CPA Mark Kohler explains how to convert traditional IRAs to Roth accounts without jumping into higher tax brackets. The strategy, called chunking, splits conversions across years to stay in sweet-spot brackets: under $40k for single filers (12%) or $84k-$160k (22-24%). Married couples have larger thresholds up to $321k.
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Hi, Mark Kohler here, bestselling author, radio show host, CPA and attorney talking to you about the Roth conversion. That's right. I'm not a financial advisor. I'm not going to tell you to buy some of my investments or stock. I'm a tax advisor helping you build wealth. I'm a lawyer trying to protect your wealth and I want to bring it all together. So I'm going to talk about something no one's talking about on YouTube and that is the proper way or time to convert a traditional IRA to a Roth. Because there's some gaps in the tax bracket and I want to expose it and show you where the perfect sweet spot is for that transition. Alright, so here's my handy dandy whiteboard and many of you that have watched other videos of mine, you know what I'm talking about here, you got to go watch the videos on why a Roth is so cool compared to an IRA or a 401K. And I how you can have a roth inside a 401k Topics for another video of mine. But this is our picture, right? We got operations, we've got our trust and we've got investments. And right here I've got my after tax and pre tax buckets. And I want to take my IRAs or old 401ks that are in an IRA position and move them over to a Roth slowly but surely. We call it chunking. I want to chunk that IRA and move it into a Roth position, which now allows me to drive a faster car and self direct it and get 10, 15% returns on a regular basis or greater, which I know is heresy for some of you. That makes you very mad to say that I would even assume you could do better than 8% in a Roth. Oh, you can watch my other videos. Roth Ira, $1 million. Mark Kohler, you'd love them. Part one and part two. So what we're trying to do is talk about this Roth conversion in the right spot. Okay? So here in this first chart we're going to talk about you single folks out there and where's that sweet spot for the Roth conversion. Alright? Now this is what I want to expose. There's seven tax brackets and that's cool, we can talk about all the different rates, but there's really two gaps no one's talking about. Right between the 12% bracket in the 22% bracket is a 10% jump. If you make too much money over this level, bam, you go into a higher bracket. Also there's another gap right here at the 24 to 32%, there's an 8% jump. So think about it. If I'm going to convert to a Roth now, what we do by that is we're taking a regular IRA that might have $100,000 in it and I'm going to convert that to a Roth. Now the day I convert it to a Roth, I've got to pay the tax on that conversion. That's cool. No penalty. I'm just going to pay the tax. I can keep the same type of investment in that Roth or I can move it to a self directed Roth custodian Trust company, whatever. Lots of that to talk about in other videos of mine. But the minute I convert that, bam, I pay tax. So if I'm at a certain income level and I convert 50 grand and it puts me into a higher bracket, a 10% higher bracket, I may not want to do that. I may want to chunk at the right amount to keep me in that lower bracket. And then wait till next year, find out where my bracket is and make sure I expose that these two sweet spots before my bracket jumps. Fair enough. Here's an example. Let's say I'm making less than $40,000. Well, right there, that is a huge sweet spot because I'm going to be in the 12% bracket or less. Now, I know some of you that are making 40,000 or less are like, I don't have time or money to convert to a Roth IRA right now. I'm just trying to make ends meet. I get it. But I'm just showing you this is your first sweet spot because I'm under 12%. So if I convert $100,000, well, I'd get into a higher bracket at that point. Let's say I convert $10,000 and I'm in this bracket. And some of you may have real estate losses that are bringing you down into the slower bracket. You may even have more wealth than you realize and be in this bracket. So you want to talk to your tax accountant and go, okay, where am I at? So if I converted $10,000, I'm only paying $1,200 in tax because. Because I'm in this bracket, this sweet spot. Now where's the next one? Well, after 12%, whoa. I jump all the way up to 22%. So if I'm in this range, I might want to play in this area right here. This is the playground I want to be. But if I'm making, okay, mark, I'm making some more money. I'm making $84,000 or more. Well, look at this sweet spot. It's a big one right here. Easy to find. Sorry, all these innuendos I need to watch out for. Some of you may be laughing. Okay, so this one's easy, but between 84 to 160. Here's my sweet spot. I'm going to only pay a 22 to 24% tax rate, but once I hit 160 grand, I jump all the way up to 32%. I don't want that. So for some of you that are in this single area, 84 to 160, you've got a really nice spot to be converting money to a Roth and know that you're going to stay between a 22 and a 24% bracket. Very easy to calculate. But look at your W2 and don't convert anything that's going to take you over 160. Okay, let's talk to the married folks. Okay, now my married folks, this one is very similar as well, but we're dealing with greater numbers because you're married. So there's possibly two incomes in the family. So the brackets are they don't kick into a higher level until a higher rate of income because there might be two incomes. Get it right. Married filing joint. Okay, so if I'm here, this 12% area is all the way up to 80 grand, where it was 40 for a single individual. Now I'm just rounding up. It's, there's some fine print, 79, whatever, but this is about where we want to be in this $80,000 range. I'm only going to pay 12% on that conversion. So again, if I convert $10,000 of my old IRA to a Roth, I'm only paying 12% in this range. That's cool because I may have again other write offs that get me into this range, but then I'm in this no man's land for a while. And I do not want to convert any money between 80 and 170 to a Roth potentially because it'll bump me all the way up to a 22% bracket. Now that, that's a big jump. This is another 10% jump, while this is this 6, I'm sorry, 8% jump right here. So why jump into this no man's land? I can stay over here. Now, if you're already making enough money that you're in this no man's land, you want to convert and but not do any more than 321,000. See, in this, this area, we're getting a 22 to 24% bracket right after this point at 321 bam, I go all the way up to 32%. I do not want to be over there. You'll miss the sweet spot. So focus. Find it. It's right here, right in front of you. This is where I want to be in converting. No more IRA money. That would put me over $321,000. Alright, so that was fun. Hopefully a few laughs in that too. I'm not going to go there. But here's the point. We want to make sure that we're having a planning meeting with our accountant before December 31st. That's right. You've got to do this before year end and choose how much you're going to convert. The old rule was you could undo some conversions before April. Not anymore. We got some nice brackets under this GOP bill where we're down to 37% fewer brackets. That's cool. But I want to make sure I'm careful and I'm making that decision before December 31st and pull the trigger. So that's what it's all about on this Roth converting. And I think you're going to love it. This has really, really been helpful for a lot of my clients. So get out there, keep building wealth, keep living the American dream and keep investing in that Roth ira. It'll be worth a million dollars or more before you know it. Thanks so much for watching that video and I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web, on Google, trying to find answers to complex questions and just clicking a mouse, hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now. Click here if you want to be a part of my newsletter. It's awesome. Weekly updates and deadlines and strategies and tips. Also subscribe to my YouTube channel. You'll love it. And make sure to click the bell icon so you get a little ping whenever there's a new video. And finally, check out my site, marjoriekohler.com with all sorts of videos, probably 70 plus videos, 30 plus hours of content that'll save you thousands of.
