Year-End Roth Conversion Checklist: 4 Must-Do Things!

Alrighty. So we're coming into the end of the year and this is really a great time to make sure that you got everything in order that you need to to begin doing those Roth conversions. So the topic of this video is really the ultimate checklist for year end Roth conversions. All right, so let's dig in. My hope through this video is to give you something really actionable and something you really put your teeth around of some really, some good, I'll call it pro tips from the trenches, so to speak, on really getting ready for the Roth conversion season. A lot of people wait till the end of the year to get it done, which is not my preference, but here we are. And so I'm going to give you some things to look at. The first thing is maybe very obvious. It's amazing how many people overlook this. You need to get a Roth IRA account established. You don't have to wait until the day you're going to do the conversion to get it done. You want to have the Roth IRA already open and sitting there ready for you. We typically suggest that you convert first from either the oldest spouse's IRAs or your spouse that has the larger balances. Unless there's a big age discrepancy, then you want to go with the oldest anyway. But if you're going to convert from both accounts, I mean you and your spouse, then you want to make sure that he or she also has a Roth IRA established. Where should you do that at? That's kind of up to you. Wherever your IRA is is probably a good enough place because you're there and you wouldn't be there if you didn't like what they were doing for you. And so if you already have an account at a custodian, then just open up a Roth IRA there, you probably do it online, get it done real quick, and it's set, it's ready for whenever you have the game plan in place and you're ready to pull the trigger. You got the Roth IRAs, they're ready to go. If all your money is in a 401k and you're going to do a Roth conversion, you need to call the plan sponsor and find out kind of what their requirements are, what their process is. And don't wait until December to do this. They get overwhelmed and they won't promise they're going to get anything done. So you need to get this done ahead of time. Right? So the 401k is probably going to require you move the money from the 401k to an IRA, sometimes the 401k accounts these days have a Roth IRA option inside the plan and they also allow you to convert within the plan. Those are questions that you need to ask of your current 401k plan provider to find out what the possibilities are. Number two is a little bit more complicated, but I've done other content on this that is, I think, very relevant. You want to have an investment transition game plan in place. And if you are a do it yourselfer on your own investments, then you're able to do it all by yourself, no worries. If you use a financial, an investment advisor to help you, then you need to have a conversation with them and you need to kind of figure out how are we going to do this? And the reason that this is important is what we're really trying to answer is the question of which assets should I convert first and which ones should wait till later. Most optimal Roth conversion game plans are not a one and done. In fact, you have to have a few life circumstances exist for it to make sense. And they're so variable. I'm not going to give them to you here because if I give you a short list and you meet those that it could be that there's another element that doesn't fit. And so just know that very seldom does a one and done work. And so if a one and done conversion does not work, then that means you're going to be converting over a series of years. Well, if you're converting over a series of years, then you want to think about which investments do I convert first and which ones remain in the IRA and I convert last. What's very common at the financial firms is they want to just take a pro rata amount of each of the investments and move it over. So if you have a thousand shares of Apple and you're going to be doing 25%, they'll just take 25% over. And if you also have an index fund, they'll take 25% of that over. If you have a bond fund, they'll take 25% of that over. And that's, that's easy and it's clean and the pie charts look pretty. But that's probably not your best interest. Let me tell you why the high flyers in your portfolio are going to grow, or you hope they're going to grow, or you maybe have assets that are depressed and you believe for whatever reason they're going to come back faster than everything else once that money gets over to that Roth. Think about what's about to happen. Whatever growth happens going forward is totally free of taxation. So you have to ask yourself, which of these investments do I want to enjoy tax free growth on first? Because everything else that's left behind is going to continue to grow hopefully and you're going to pay tax on those. So I want to pay tax, I want to pay less tax over my conversion life line than I then more tax. And so the assets that are going to grow slower are the ones you want to convert last, the ones that are going to grow faster or maybe are more volatile, those you want to convert first. So you're going to look at your account and you're going to have maybe a lot of risk relative to, to the total sitting in your Roth to begin with. But you never want to change, you never want to change your overall risk tolerance of your portfolio. Although the, the Roth may have the more aggressive funds in total, you still have the same risk profile. You just selectively move the assets that are going to grow the most over to the Roth. And the reason that you're doing that is as they grow, if you're right and if they grow, then all of that gain is totally free for the rest of your life and you're going to pass it to your heirs totally free as well. The point of this is that there is, there is a lot of strategy that needs to go into figuring out which assets move and which assets stay. If your investment advisor, if you can ask them the question about which one should we do first? If they answer correctly, according to, at least according to Craig of what's correct, then you can trust them with that process. If they say, well, we'll just move these over and we'll move those over and they don't and they just do in a proportionate amount, then probably you need some additional input on making that work. That doesn't mean you change investment advisors if you're happy with their performance. It just demonstrates they've never really thought through this a lot and they're probably smart people, they can help you with that and maybe you can tease them up with a little of the information I'm giving you here and make that work for you. But you have to have a game plan, right? Number three is get a charitable giving plan. Consider what do we normally do? So if you're already of RMD age required, minimum distribution age, then you are aware that you can do what are called qualified charitable donations, QCDs out of your IRA directly to a 501c3 organization and has to go from the IRA to the 501c3, not through your pocket first, but if you do that, then you don't have to pay tax on that distribution. It goes straight to them and it makes it work. If you're somebody who gives consistently and you know that over the next 5, 10, 15, 20 years, you're going to continue to be a giver to the organizations that you care about, there's a couple really cool vehicles that you can use to accelerate your giving and to offset the tax this year from the distribution you're going to have from a large conversion that you're going to do. So let's assume that you're going to. Let's say your conversion game plan calls for $300,000 that you're going to take from your IRA and you're going to move to a Roth this year. Well, let's say that's $100,000 of tax because of that, or $90,000, whatever number you want to use. If you have money sitting over in the brokerage account that is just sitting there, even if it has a capital gain, a long term capital gain associated with it, that doesn't really bother you could actually use something called a donor advised fund, which is just a different style of an account. You can hold the same investments you currently have. And let's say you're at one of the big custodians. You can take that 300,000 and make a donation into that donor advised fund, which now becomes a qualified charitable deduction from your tax return. And it now offsets that $300,000 that you are going to take in a distribution this year for a big Roth conversion. Now, I'm just giving you a concept and I'm at about 10,000ft on this because. And you need to check with a CPA or your tax preparer because there are limitations to how much of your adjusted gross income can actually be given to a charity. And you also get the tax deduction in a year. I'm giving you a concept, and I know our CFPs work with people all the time and help them to figure out what those numbers are. But get with your cpa, they can help you with that part of it as well. But if you have a strategy and you know what you're doing, there are some opportunities to really cash in on some great tax savings because while you're doing these conversions, you're likely going to be at a much higher tax bracket than what you will later. And so those tax deductions become pretty significant on a percentage basis to make all that stuff work for you. So again, this is something that we like to have clients double check with their tax preparers and we work with a network of our own CPAs that we work with as well. Then we just try to make sure that we manage how that works. All right, so there's the first three. The last tip that I go through over and over and it's really just my stick is there are so many moving pieces in getting the Roth conversion done right. And there are so many false paradigms and false assumptions that people make that having a, an organized game plan is really important. I don't mean, and I don't mean make sure you have a spreadsheet. I'm saying make sure that if you have your own spreadsheet, make sure that you have evaluated every possible tax bracket even higher than what you think is going to work and look and also figure out how much of the total should you convert. So if you got $2 million, probably you don't need to convert all of it. You can save some of it back and it can be used for QCDs or itemized deduction offsets, those kinds of things where you don't have to pay tax on all of it because life will just mean that you're not going to pay much tax on a small balance of it. So how much do you convert and then over how many years is the optimal plan? And that's not something that is done just by a guess. It's something that you can calculate mathematically because the optimal years also has to be correlated to was it worth it? Did my net worth become relatively unaffected or improved because I did this? Not we're not just saving taxes to save taxes. Right. And then the third is what's my optimal tax bracket? So that game plan is, I think is fundamental to all of this and making sure that, that everything else is just a matter of. It's part of the ingredients that go into making this, the soup that we're making that is a better tax free future for you. So think about those things. Those are the checklist items. Those are the things that are important. Those are the things that we believe we've seen have made a huge impact in people's lives. And that's what our CFPs do. We've got independent CFPs that work for us all around the country that can handle and help you to determine the answer to some of these questions. If you feel like you want to bring a professional into the conversation to help you with those things. By the way, we put a 100% refund offer into all our financial planning agreements. If we're not able to save you at least a half a million dollars of taxes through the strategy we bring up, we refund all the fees that you maybe would have paid to us. And you can go to our website, q3adv.com, and you can look at more of how our fee structure works, how we work with people, all those kinds of things. But regardless of whether you connect with us, this checklist is valuable for you, even on your own, just to know that you're doing the right things. All right, Take care. Have a great rest of your week. God bless you.