5 Mistakes That Will RUIN Your ROTH Conversion

Five mistakes people commonly make when doing a Roth conversion. So as an advisor and for let me just say in general, and I hope we can get all of you just re energized about this. My wealthy clients have Roth IRAs. Predominantly. I am working this year on doing some another Roth conversion myself to get as much of my traditional money converted to Roth. When you do that, you've frozen your retirement account from ever being taxed again. And I'm going to talk on some mistakes people make and some strategies when they do the Roth conversion. But please remember, for your own personal life, for your parents, for your kids, for your loved ones, your friends and for your clients, for those that are advisors, please continue to talk about making sure they convert as much as possible each year. We call it chunking from traditional to Roth. People want to know the equation to tax free wealth. That's number one. There's several others, but that's number one. So we're going to really be focused on that on a regular basis. But the tonight or what are today of what I wanted to talk about is five mistakes people make when they're trying to convert to Roth. Okay, so here's the five mistakes. Number one, a lot of clients are going to try to convert to Roth all at once. So number one, do not convert all at once. Now that's the general rule. If you have a client with 20 grand in a traditional, they're going to convert to Roth. Done. No big deal. You got a client with 200 grand trying to convert all to Roth. What you want to do is a analysis on what tax bracket you expect them to be in and if it's going to jump to the next tax bracket. Some of you may have seen my Roth chunking training or seen it on YouTube. And basically with the tax brackets, there's, there's two major jumps in the tax brackets. Who knows what that is? And we don't want a client doing a conversion that pops them into the new bracket. We want to do chunking in this range and in this range. So that way clients aren't getting a huge tax hit to convert to Roth. So this adds a lot of value to you as a tax advisor. In November and December, it's our busiest time of the year. Clients, literally, I would tell client, I'm telling clients now. Make your appointment for one of the tax lawyers now for November and December because we're that busy, because people are calling up going, I got a chunk Roth. I want to get my 401k done. I want to get my Kids on payroll, I don't know what to do with an auto. And a lot of clients have questions. So for those of you that are business owners, make sure you're making that appointment with your advisors and you advisors be reaching out to your clients now, telling them it's time, you know, and this is where we make that transition to the advisory practice. Anyway, so I tell clients, don't convert all of your money at once because the tax bill could be substantial. Let's do it in chunks. Number two, mistake, number one. Number two, the number two mistake is that clients will take out money to pay the tax on the part they're converting. So let's say they're trying to. So let me say don't take distribution to pay the tax. If your client doesn't have the money to pay the tax, then tell them it's not time to convert. But remind them any conversion they do now, they don't owe the tax until April 15. They could even wait until middle of next year because the failure to pay is not a tremendously big penalty. It's cheaper than a credit card, and they could even get on an installment agreement with the IRS to pay that Roth conversion. Worst case scenario. And if they've got an asset that's going to be highly appreciated. I'd rather have them paying on an installment agreement for a conversion than paying tax later on their Roth account. Doubling. Let's say your Roth account just invested in a startup and you're expecting it to, to bounce double in the next 12 months. Hell, convert that to Roth. Now, even if you're on a payment plan with the IRS because you'll never be taxed again. So we want to be. So, but let's give an example. Let's say a client has 100 grand in a traditional and they want to convert it over to Roth. And they're in a 30% fed and state bracket, so they're going to owe 30 grand in tax. Well, they go, well, I don't have 30 grand in tax money to pay this tax, so I'll convert 70 and I'll pull out 20 grand to pay the tax. Well, now you're, you're paying. If you're under age 59 and a half, you're paying a penalty to pull money out of your retirement account to pay tax on the conversion. Not good. So I tell the client, just convert 30 grand, find the money somewhere else to pay the tax. Sell that RV on the side of your house or some crap that you don't. You're not Using and. And then let's not pull out money to pay tax. Not a good move. All right, Number three, don't think next year's going to be better. Don't think next year's next year is easier. Let's say a lot of clients will say, well, I'm not going to convert to Roth because next year I'll be in a lower bracket. That year I thought I was going to be in a lower bracket. Some of your clients are in the highest bracket no matter what. So just always I want my clients constantly looking at converting. And this fallacy that I'm going to be in a lower bracket next year does not make sense. So what I do try to point out in this one, here's the strategy, is try to make the conversion tax neutral. I just had a phone call with Michael Nicelli today who spoke at the 360 event, which now I hear the recordings are available on the intangible drilling cost oil and gas tax deduction, where it can be as high as 100% in the year you invest in oil and gas. So you could have a client have other funds. Maybe they've got 50 grand over here that they can put into oil and gas. Convert 50 grand to Roth. The deduction on the oil and gas wipes out the tax on the Roth conversion. You may have a client doing a real estate deal, self rental. They could cost seg 100 grand here. Roth convert 100 grand here. So it makes it tax neutral. So when you have clients in a higher bracket or they think, oh, next year will be better, now throw out strategies to offset the Roth conversion. Huge value. Number four mistake clients make is they forget the 31st is the deadline and that is December 31. A lot of people think it's April 15 because it's April 15 to make the contribution to the Roth IRA, but it's December 31 to do a Roth conversion. So very common for us to get frantic emails and letters on April 14th. Do my Roth conversion. Do my Roth conversion. We're like, that deadline was April, was December 31st. It's Roth contributions. If you're doing a backdoor or a Roth con or a traditional contribution, that's April 15th. So make sure you remind clients it's December 31st. So it's a wonderful email. Many of you that have private practices, you want to be holding webinars and podcasts or sending out emails to your clients warning them about the deadline. And number five is mistake clients make. Let's see if you can see this behind My laptop number five is. They think it's easy. There's an easy button. Mistake number five, There is no easy button. I myself faced this last month. I was doing two Roth conversions. One from Acorns over to Directed IRA and one from TD Ameritrade. And, oh, my gosh. I was like, okay, I need to. Because you have to do. You can't transfer from a Traditional to a Roth at another location and think that's a conversion. You have to transfer from Traditional to Traditional and. And then do your conversion at the same trust company or brokerage that's holding your retirement account. Now, at Directed Ira, we have a form that does them all at the same time, but it's a specific form for that. So even my. I might. Me, myself. I myself, whatever. Me, myself. As an owner of Directed Ira, I called the helpline, and I was like, who's this? Oh, hey, Ryan, Mark here. Can you help me with my Roth conversion? Because they're in the trenches doing it every day. And I myself was like, how do I do this again? Because all the big brokerage houses have different procedures and timing, which form to fill out. So don't make sure you get. And this is what's great about Directed Ira. There's a help line, a chat line. Get on that right away and say, hey, I'm doing a Roth conversion in this way or from here or with this amount or with this client or whatever, and get their help, and it'll save you a ton of heartache.