5 Roth Conversion Mistakes that Increase Taxes, Raise Medicare Premiums & Reduce Retirement Income

[@NaufalKnoechel]

I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for.

[@Theodore-tu5zg]

I think a lot of us focus on building our retirement fund, but tax planning can make a huge difference once you actually start drawing from it. I’ve heard of people who end up with way less than they expected just because they didn’t plan for taxes properly

[@SicilyJo]

Sir, your explanation is the cleanest, clearest, comprehensive,and most concise explanation I have experienced over viewing many videos from other financial experts on KZbin. Thank you! You are appreciated!

[@PrincessLolly1]

Root Financial, podcast with James Conole, is another well-reasoned (not flashy) CFP channel I follow.

[@jonscrivner9087]

Do roth conversions before you begin SS benefits. Use IRA funds to fund your retirement to postpone starting SS benefits and increase the benefit while lessening the balance in your deferred account.

[@jpravago]

How would you know the future tax brackets?

[@poolmilethirty2859]

Thank you. It would help to see the graph in full.screen as one listens to your explanation of ot.

[@Ismatkhimani]

IRA can double every 7.2 years at 10% return so $200,000 can become $800k in 20 years So it may make sense to start converting when your income is down or have business losses because u may end up paying. More

[@RAA-ud2ll]

Great show. thanks

[@matney12]

Good morning, does your standard deduction reduce the amount of your Roth conversion? I have no income, so I’m wondering if I convert up to the standard deduction if that means I pay zero tax

[@LarryO1022]

Yes, the Roth conversion amount is treated as income on your 1040. With no other income, your standard deduction will reduce this amount by the amount of your standard deduction. Any Roth conversion in excess of your standard deduction will trigger tax

[@carlhyman5540]

I'm in the position of having a significant amount in traditional IRA'S. My only realistic option is to pay the taxes from the conversion, but how would I know if it's beneficial

[@kersting13]

You know it's beneficial if you're paying taxes at a lower rate on the conversion than you will be at withdrawal. That's ALWAYS the way to know whether it's beneficial to do a conversion. Where it gets complicated is the fact that you can't definitively predict the future. If you KNOW you'll have very large RMDs in the future that will push you into higher tax brackets, and you can convert now with lower brackets, it *should* be beneficial. It's just MORE beneficial if you can pay taxes from outside accounts.

[@1dash133]

Great discussion, you hit all the high points. However, I'm not sure how much penetration you got into the general audience. Seems like it's a case of "preaching to the choir". Those who are familiar with the ins and outs of traditional IRAs, Roth IRAs, marginal tax brackets, Medicare and IRMAA will be the ones who benefit the most from your video - but their base knowledge was already pretty good. For those who are not familiar with these factors, your video may perk their interest - but won't actually add to their knowledge of the subject, because all of the financial connections are over their head. Biggest omission is a lesson on accounting: Roth growth post-tax vs. Traditional growth pre-tax. IMO, over half your audience (maybe 3/4 of your audience) doesn't understand the basic math behind their growth. A x B x C = A x C x B. Always. Every time. Substitute $Investment for A, Interest rate for B, and Tax factor for C and this models Traditional investment vs. Roth investment. A x B = ($Investment x Interest rate) = Your IRA fund total after investment time period, before taxes. A x B x C = ($Investment x Interest rate) x Tax factor = Your IRA fund total after investment time period, after taxes. A x C = ($Investment x Tax factor) = Your Roth fund starting value, after taxes. A x C x B = ($Investment x Tax factor) x Interest rate = Your Roth fund total after taxes, after investment time period. No matter how much you invest, no matter how much interest rates fluctuate and no matter how long a time period they are invested, the two funds will grow and end up being equal provided the same interest rates are applied to both accounts AND PROVIDED THE SAME TAX FACTOR is applied to both accounts. The tax factor is the one variable that is least likely to remain constant over the life of each investment account. Therein starts the discussion of tax brackets and the advantages/disadvantages of Traditional vs. Roth accounts. Such discussion starts AFTER understanding that basic financial mechanics are the same. If we didn't artificially introduce tax brackets and IRMAA limits, and if government didn't dictate RMDs for one type of account and not the other, then there wouldn't be a difference between the two types of accounts.

[@kersting13]

Wouldn't the best "timing" strategy be to do say 90% of your conversion at the beginning of the year, and then "true up" to a final amount near the end of the year? You can do as many Roth conversions during the year as you like, can't you? Converting later in the year isn't as good as doing it earlier (assuming your account is growing).

[@Brins-g2k]

I believe his concern is that early conversions drive the need to do estimated tax payments; if you calculate these payments incorrectly and fail to pay enough then the IRS will penalize you thus driving up your costs; whereas a later conversion can still be paid off using normal tax filing processes with less drawbacks

[@kersting13]

@@Brins-g2k I don't get that as his concern at all, and you've got to make your estimated tax payment no matter when you do your conversion. It seemed to me his only concern was knowing exactly how much to convert. I'm saying that the whole point of doing a conversion is to move money from the trad to the Roth, and if you allow the trad to grow for 10 more months, it could wipe out the entire reason for doing the conversion. Doing conversions late in the year is like starting your conversions a year later than you should.

[@Brins-g2k]

@@kersting13 I agree if you are doing back-door Roth conversion of your IRA; but for some reason I was thinking converting your 401K funds. My mistake

[@darrelgrove5304]

Completely agree! If you’re converting $100k of assets earning 7% and you do it in early January you really moved $107k but only paid the tax on $100k. It keeps the $7k out of your IRA (on which your will pay tax on later) and moved it tax free into Roth.

[@larryjones9773]

I convert 90% of my planned Roth conversion in early January and my final conversion in late December, once I know all my tax numbers. You are 100% correct. Any delay with Roth conversions is usually risky/costly behavior.

[@lindsaynewell6319]

This was a useful tutorial until the statement at 9:42 which is absolute BS. Feel free to reply below with details of a Roth conversion example where someone's medicare premiums could "go up by hundreds of thousands of dollars".

[@just-to-be-clear]

I think he said "hundreds or thousands" not "hundreds of thousands"

[@RetardedSissy]

Example: For MAGI 500,000 part B monthly premium is $594. ($420 higher than the lowest premium). That's $5040/year. So you pull that additional $5040 yearly out of your, let's say, 8% investments. After 20 years of pulling the extra $5040 your opportunity cost/loss is $254,000.

[@larryjones9773]

He misspoke: Medicare premiums can go up hundreds OR thousands of dollars. I got hit with two years of higher premiums (because of the two year look-back period), as I was unaware of IRMAA. But, now I closely monitor. I added 'MAGI for IRMAA Goal' as a line in my retirement spreadsheet. And, I added this comment to my spreadsheet: 'Estimate, final amount will be available in October of following year. Google 'Finance Buff IRMAA' for amount.' Thus I now file my tax return in October. The 'Finance Buff IRMAA' article is timely updated and is EXTREMELY HELPFUL. I've been using it for years.

[@user-js4ez2yz9b]

If i retire at 50 and start to do convert 401k to Roth. Will the 10% penalty apply? Is it considered early withdraw?

[@NJBKATL]

No, it's a conversion you'll only be subjected to a 10% penalty if you withdraw that converted money from the Roth account before 5 year conversion window.