Dave Ramsey Is Disastrously Wrong on Roth Conversions

[@Inmate533]

Dave Ramsey's good at advising people on how to get out of debt. On investing...not so much.

[@daveyk3436]

EXACTLY!!!!

[@eq2092]

Yes this is what I found myself.

[@tadrod2323]

lol, he is a billionaire, he is not perfect tho

[@eq2092]

@@tadrod2323 #1 he isn't worth a billion #2 didn't make money from investing but from radio, TV, books, and his provider network that he gets kick backs from.

[@mcmccoy1184]

Yes! His “baby steps” programs for folks who want to get out of debt is very good. And he and his followers would all be better off if he stayed in that lane. I’m reminded of an interview with Warren Buffett about 2008. House prices were going up like crazy; people were buying using mortgages that were being rubber stamped by lending institutions. It all felt a little crazy. And as we all learned in 2009, it WAS crazy. Back to the Warren Buffet interview in 2008, he was asked about housing prices and mortgages and subprime loans. Mr. Buffet said, “I don’t know. I understand the stock market. The real estate market does seem to be in an unusual phase now, but that’s really not an area that I know well.” I already appreciated Mr. Buffet’s expertise, and that’s when I came to value his humility.

[@77magicbus]

Great advice. I realized I was getting myself into a tax liability with my Trad IRA and My 457B plan about 3 years ago. I had a big winner in Tesla stock in 2020-2022. My deferred accounts went way up over 1.2M. I had saved for 30 years at work in a 457b and for several years in my own Roth IRA. Suddenly I was forced to retire because of Covid mandates. I started making large Roth IRA conversions about 3 years ago. This year was 300k, next year will be my last year doing 228k. I am so happy I woke up and realized what was ahead. I read your book and watched a couple videos recently. I was a state worker so I accumulated a large pension so I won't be in the zero bracket in retirement. But at least I have a multi million dollar tax free Roth account. Thanks

[@formeyousee]

At 7:36 are you saying that my higher income at age 50 means I shouldn't convert traditional IRA funds to a Roth IRA because I'm already paying a high 32% income tax and shouldn't add the conversion tax to that? I should wait until after 59 1/2 when I'm retired with a lower income and then do a Roth IRA conversion?

[@DavidMcKnight]

Sure am.

[@n.g.1577]

@@DavidMcKnight I did not know that the income tax table (tax rate chart) was also age-banned?

[@kevinedward4195]

Dave didn't drop the ball. He was just making a point that you have to watch the brackets as you do the conversion. For some people taking advantage of the 24% bracket makes sense, and for other it does NOT make sense to use the 24% bracket. It depends on your IRA balance and income!. Lower income/balances will allow you to spread it out over time.

[@DavidMcKnight]

Why wouldn’t anyone want to take advantage of the 24 if they were already in the 22? 24 is still lower than 25 which is the future version of the 22.

[@kevinedward4195]

@@DavidMcKnight I was just making the point that certain people might want to leave some money in a qualified account if they know they are going to have medical or LTC withdrawls, which drops or eliminates tax completely! I am converting 60-75%, but I am also leaving some in qualified accounts as a hedge for LTC/medical costs. ALSO, people near the 15% bracket threshold might be able stay in the 15% bracket using various strategies (charity bunching etc), and spread the withdrawl over time to stay in the 15% bracket. BUT I do agree the Trump Tax cut brackets are a gift that should be optimized, and that taxes are only going up, at least for the higher brackets.... AND back to the original point.... Dave was not giving comprehensive roth strategy, but rather emphasizing to watch the brackets as part of an overall plan. I think you "might be" Ramsey bashing a bit for the sake of your own channel ratings ;-)

[@DavidMcKnight]

@@kevinedward4195 👍

[@kevinedward4195]

@@DavidMcKnight I do appreciate your insight. I don't think higher earners realize what a gift a 22-24% tax bracket is, but for those on the bubble there are other strategies to consider also.

[@ShadowZergling]

@@DavidMcKnight Because you might be FIRE and planning to have 0% on conversions up to the standard deduction every year. Just like you criticized Ramsey for his "one size fits all" advice, don't then fall into the same trap yourself.

[@philosophyze]

I came across Garrett Gunderson and his book "Killing Sacred Cows" and it started my mindset transition. One of the biggest differences between financially successful and unsuccessful is how they think about money and wealth. Dave Ramsey teaches a budgeting "shrink your way to wealth" mindset vs an abundance creating more value mindset.

[@DavidMcKnight]

Great comment. I’ll have to check him out.

[@timothyletkeman]

@@DavidMcKnight 30 years old. 100k in a old 401k plan. Should I convert it over the next two years. This would keep me in the 22% bracket.

[@eq2092]

​@@timothyletkemanno just build up wealth in Roth and a Taxable Brokerage Account. Also if it's an older 401K at an employer just convert it over to a traditional IRS. Aim to invest 25% of your gross income.

[@Tony-dx3eo]

I'm ok with the 10 and 12 percent tax brackets but it's a huge jump from 12 to 22% (83% increase!) that I'm not a fan of.

[@DavidMcKnight]

Yes that’s a difficult jump.

[@bensexton254]

And this is why the middle class is always screwed when it comes to taxes@@DavidMcKnight

[@andrewy4761]

If you hit 73 with a sizable IRA, then mostly likely you will be at 22% or higher because of RMD.

[@biblebound4981]

My Question: I am maxing out my Roth IRA as well as my Federal Government TSP Roth. I am also over 61 years of age. Can I convert my Traditional TSP into my Roth TSP at anytime?

[@alrocky]

Thrift Savings Plan does not currently allow conversion from traditional TSP to Roth TSP. $8k Roth IRA + $30.5K Roth TSP is a chunk of change!👍

[@lidarman2]

The 24% bracket is the sweet spot for sure. But it is better to pay the tax with cash if you have it.

[@robannmateja5000]

I agree that Ramsey's statements about the 5 year rule were inaccurate, as well as not considering Roth conversions in retirement. But there is something else people need to watch out for if they are in retirement and on Medicare. Doing conversions could also bump you up into an IRMAA bracket and those don't work like marginal tax rate brackets. One penny over and you can get hit with a HUGE monthly Medicare Part b premium. Yes, that lasts for two years and not in perpetuity, (or one year if you can get it adjusted), but it's something to watch out for when doing Roth conversions. But the benefit is once converted, you can use those funds without worrying about IRMAA. I look at IRMAA as another form of taxation (and one that can be very unfair to seniors... for example, if you sell your home to go into assisted living, you may have to pay a huge IRMAA penalty if the proceeds exceed the allowed limited on capital gains- not an uncommon scenario).

[@NicholasGramazio]

Great video, thank you! I'm looking to change my Pre-Tax 457(b) to a Roth 457(b), but just want to make sure its our best option. I am in year 5 of a 30 year career (90% pension retirement, annual final compensation is our best 8 years and I expect a 5-8% raise every year). Given this, is it safe to assume I will be in a higher tax bracket at retirement than now, therefore Roth 457(b) is the way to go? Thanks!

[@davidmcknight8201]

I'd need to know what your income bracket is now, and what your pension is likely to be down the road given your pension. And, what if tax rates double like many experts are predicting? Generally, the father out your retirement date, the more the Roth accounts make sense.

[@NicholasGramazio]

@@davidmcknight8201 I am married file jointly 24% tax bracket, and my projected pension payout is about $7700 per month, after the 30 years of service. Thank you!! The pre-tax 457(b) has $23,000 invested, should I also in-plan rollover that to the Roth 457(b)? I assume that will incur an income spike, but keep me in the 24% tax bracket, regardless.

[@chanson8508]

What excellent kinda job is this? Does it pay or have the potential to pay 6 figures 🤔 🤑🤔

[@cayankeelord3730]

One downside of using converted IRA to ROTH funds to pay the taxes due on the conversion is those funds are effectively removed from the tax free protection of the ROTH reducing your ability to create more tax free wealth. If you have other funds to pay those taxes, you will come out ahead by leaving those investment dollars in the ROTH and put them to work!

[@DavidMcKnight]

Sure it’s not optimal but Ramsey’s position is to not do it at all if you don’t have cash on hand. Most people pay tax on their IRA distributions out of the IRA itself eventually anyway through withholding. It’s better than just letting it get crushed by higher taxes.

[@swright5690]

Yeah..l but writing that check to the irs from savings is hard. Ask me how I know😢

[@billmartin1663]

@@DavidMcKnight David, focus less on Ramsey (obsessed much?) and more on getting things right! You'll gain more subscribers with a less vindictive, more fact-based approach. Don't twist your scenarios to maximize Dave's perceived errors. Fit your scenarios to your audience!

[@dtovar2]

First, thank you for the video. For years, I have been paying cash for my Roth 401k and Roth 457 conversions when I do my annual taxes. I'm not quite 59 1/2 years old. I contacted my 401k administrator, Empower. They said that regardless of age, that they not withhold the taxes from the conversion and therefore I would still have to be paying cash for the conversion. Am I missing something?

[@DavidMcKnight]

Unfortunately you must always pay the tax on a Roth 401(k) conversion out of a separate account. Your administrator is correct.

[@dtovar2]

@@DavidMcKnight Yes. But the separate account would be a savings account. Hence, it is cash. Isn't this what Mr. Ramsey is saying. I appreciate your expertise and assistance.

[@DavidMcKnight]

@@dtovar2 Ramsey is correct when it comes to doing a Roth 401(k) conversion AND a Roth conversion prior to 59.5. However, once you get past 59.5 with a traditional Roth conversion, there is no such requirement, and he doesn't make this distinction.

[@wyzyguy726]

I did exactly this … filled up the 24% bracket… paid the tax in cash because I’m under 59.5 … it was hard to believe it was worth it but forward tax planning showed me that it would force me into higher brackets in the future if I we into early retirement with too much pretax $. Don’t convert too much but consider taking a look before 2025 ends. If I waited to retire to convert the tax brackets would at minimum 10/15/25/28 Vs 10/12/22/24.. 3-4% makes a massive difference when compounded over what I hope to be a 30+ year retirement.Good video. Everyone’s situation is different and it is very difficult to determine without really taking at look at all income sources and getting a handle on expected expenses. A planning software is a must.

[@DavidMcKnight]

Great comment

[@ronaldmoody4766]

Why do you think tax rates are going to double in the next 20-30 years?

[@DavidMcKnight]

$239 T of unfunded obligations for SS, Medicare and Medicaid.

[@ronaldmoody4766]

@@DavidMcKnight over what time horizon does your number cover? The Cato Institute projected 80T over the next 75 years.

[@billmartin1663]

@@DavidMcKnight They've never paid them before. Why would they double tax rates to do it in the future? They won't. Dave Ramsey's not the only one dropping balls here.

[@josephboland6087]

How do have IRS withhold the tax from the Roth conversion itself? I don’t have the cash to convert but your Dave Ramsey critique interest me when you mention the above. I just don’t know what that exactly means and how it is done.

[@janc.8197]

We use Fidelity for our IRAs, and when we do a conversion online, it simply asks you if you want to withhold tax from the conversion amount. Similarly, if you were just withdrawing from the IRA, they'd also ask you if you want tax withheld from the distribution.

[@casperlabuschagne6250]

Thank you, sir! That was one of the most useful 10 minutes I have spent in my research on Roth conversions.

[@DavidMcKnight]

Glad I could help!

[@pcash4088]

I have done some forward tax planning myself and also used an advisor and numbers show I should actually go into the 32% bracket last year and this year. I’m retired with a pension and cash available to pay the tax. But do you ever see a scenario where 32 % makes sense. I look at my total after tax net wealth not just taxes paid to make my conversion amount determination. I’m 60 years old. Thank you for the info you shared.

[@kwilliams2239]

In addition to the 59-1/2 5-year rule, there is also a 5-year rule on NEW Roth accounts. The account must be OPEN for five years before money can be withdrawn. This doesn't apply to many but it is a potential gotcha. Yes, I was stupid enough not to open a Roth before retiring but it really doesn't matter much. As far as tax rates, I don't see the 10 or 12% rates going up much. I don't see much of a political apatite for "taxing the poor". There is also huge jump in taxes for conversions at the $47150/$94,300 mark. I sure don't see the 12% bracket going up to 22%.

[@Persto1208]

Appreciate this education. Where can I find your investment advice for people in their 30s and 40s who only have a mortgage with no other debt?

[@DavidMcKnight]

Have you ready any of my books like The Power of Zero?

[@Persto1208]

@@DavidMcKnight I listened to both Power of Zero and Tax-Free Income for Life. I will need to reread them, as I’m just getting started with investing and a bit overwhelmed with understanding where exactly to begin.

[@davidmcknight8201]

@@Persto1208 You may want to try The Volatility Shield as well. More appropriate for your age.

[@MaumeeQuilter]

Why do you keep assuming that conversions need to be done all at once. Do it over 4-5 years while you're young!!

[@DavidMcKnight]

I’m a big fan of the 4-5 years. Who is saying otherwise?

[@Runeblade484]

This is an interesting take. I am in my 30s and put money in a traditional 401k and Roth IRA (max both). I am single and in the 24% bracket. The taxes I save by using 401k get added to my brokerage account investments. While they are not tax free, they will only apply to capital gains instead of income when I sell them. As someone looking to retire much earlier than normal (45-50), is this an unwise strategy? I am thinking I could wait to do Roth conversions in my early retirement when I am only taking from my brokerage or possible rental property. My taxable income would be much lower and I could start to do conversions at that time.

[@raymondk6721]

hello

[@mnotlyon]

I am not a financial adviser, and this is not financial advice. My experience is that maxing my 401k was one of the larger mistakes I made. Here's what I wish I had done; 1) invest up to the company match in my 401k 2) max out my roth 3) max out an HSA if you qualify. 4) Invest the rest in a standard brokerage account. (this assumes you are a buy and hold type of investor, and that you do NOT have a ROTH 401k available) Here's why; 1) The company match is worth the taxes you MIGHT have to pay. 2) ROTH is tax free at retirement, and can be used without penalties or taxes within limits before retirement. 3) You're gonna have health care expenses, and why not pay the tax free? 4) There is NO long term capital gains tax on your first $89,250 of GAINS PER YEAR (if you're married). This is MUCH better than a traditional 401k tax treatment. So, during retirement, I'd draw nearly 30k per year from my traditional 401k. This would be tax free because of standard exemptions. Then, I'd take out about 60k of GAINS from my brokerage account that would also be tax free. If needed, I'd pull additional money from my ROTH, and of course pay my medical with the HSA. This gives me a tax free income in excess of 100k per year if I've made good investments.

[@edhurtado4784]

@@mnotlyonExcellent!

[@jarrettpierce5626]

I have 40k in a trad tsp and I’m 38, is it better to split it 20k/20k over 2 years or just do it all in one year? I can pay cash most likely

[@DavidMcKnight]

Depends on your current tax bracket.

[@Bob_Zombie]

One of the most complicated parts is that conversion triggers all sorts of other financial actions. You can't do the modeling in a spreadsheet, you need a tool. I have used MaxiFi Planner and it seems pretty good. You set everything up (including presumptions on future tax brackets) and see how much you will have to spend across your life. Then you put in some conversions, see what the impact is. I really wish it optimized it for you, but it doesn't, you have to use trial and error. But it's way more accurate than a spreadsheet and way cheaper than hiring someone to optimize it for you.

[@DavidMcKnight]

Thanks Bob.

[@ralphparker]

You can model it in a spreadsheet. It is hard and you are pretty good with spreadsheet to do it. My version had macro resolving the annual taxes and other functions and the spreadsheet solution is very iterative to make sure the savings accounts didn't go negative.

[@justinchamberlain3443]

Good subjects mentioned to re-review 0:55 tax bracket factors

[@nmort09]

Great video!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?

[@tobywhitaker4246]

Ask Dave

[@brianprobert3090]

I came here seeking clarity and ended up more confused than before. The part about only 5% of people being able to pay their tax bill on the conversion with cash doesn't make sense. Your example seems to have someone trying to convert the entire $1M all at once. Ramsey doesn't tell people to do that. He recommends one bite at a time maximizing the lower tax brackets. The other consideration that I have to figure in is our 7% state tax which takes another sizeable chunk. I need to boil it down to a simple equation I can work with

[@davidmcknight8201]

Example: If you want to convert $1 M over the next 10 years, you would need to convert about $130k per year (assuming your IRA is growing.) That means you'd have to have available liquid cash of $30k to $40k per year. If you only have $100k in cash, and that's serving as your emergency fund, it's just not enough to pay the tax for each of those 10 conversions.

[@eq2092]

You can't boil it down to a simple equation because there is none. This is a complex problem that is very dependent on your own personal situation. It's called "personal" finance for a reason. Get you a good CFA and CPA to work with you in order to come to an optimum solution.

[@raining1975]

If you rollover a Roth 401k to a Roth IRA, can you withdraw that full amount tax free before 59.5 if you wait those 5 years? Or is this kind of thing only for trad 401k -> Trad/Rollover IRA -> Roth IRA

[@DavidMcKnight]

This article might help: smartasset.com/retirement/roll-over-roth-401k-to-roth-ira#

[@bobbycrowe5]

So for someone like myself who makes 350K per year, 52 years old, have 1.3 million in 403B/IRA accounts (contribute the max amount every year), high risk return strategy, plan on working at least another 10 yrs, have 170K in a brokerage account also in high risk return strategy (adding approximately 36K per year), 100k in a money market account, expecting $4500 in social security per month at 65 for both of us, and will have a pension that pays $3000 per month (which I will start receiving at age 54), should I start contributing my annual 403B money to the Roth 403B plan at my work and build that account for the next ten years? Currently my employer does not match any ROTH contributions. When my financial advisor (Raymond James) did future projections, at some point because of my RMDs, it had me projected to pay upwards of $140,000 in TAXES some years! I'm concerned that I don't have more assets in the "tax free bucket".

[@DavidMcKnight]

I think you have good reason to be concerned. It would be hard for me to give you a recommendation without knowing all the information but if you want to go to my website davidmcknight.com we can discuss some solutions.

[@comingshortly]

Good video. It is more complicated and individual, taking into consideration income needs, health and marital status, beneficiaries or charities etc. When I do the math, yes I will come out slightly ahead in my late 80’s/90’s and my beneficiaries come way ahead if I convert. But for the next 20 years, which are the ones I can enjoy and travel etc hopefully, I would rather not “pre pay” the tax for benefits far away and not likely to matter at that stage of life. As for the unneeded RMDs, I will invest them in a brokerage account, where I will not have a 5 year waiting period, can take advantage of capital losses during my lifetime, and my heirs get a step up in basis making it tax free to them.

[@DavidMcKnight]

No 5-year waiting period on the converted portion if you’re over age 59.5.

[@jimshowtovideos]

and he says you can't access the converted amount, you can access the basis but not the earnings without penalty unless the 5 years has passed.

[@pilgrimlarry]

First, $100,000 isn't an emergency fund. That's an emergency fund plus a lot more for savings. Second, Ramsey never says to always just blindly convert EVERYTHING all at once to ROTH, but rather convert more manageable, smaller amounts each year as you can afford to pay the taxes. So maybe only convert $10k per year if that's what you can afford, for example. Oh, and I literally just watched a video before this one where Ramsey was onboard with a 65 year old guy converting his existing 401k to ROTH. So you either don't actually watch Ramsey, or you don't understand what he is saying. Either way you are definitely NOT qualified to be criticizing him. Just saying.

[@davidmcknight8201]

Thanks for your comment. I actually specialize in Roth conversions and have written books that have sold over half a million copies on the subject. Dave Ramsey is all over the map on Roth conversions. Watch the video--he makes a number of factually inaccurate statements on his website and gives arbitrary reasons that misinterpret IRS regulation for why one should not consider doing a conversion.

[@billmartin1663]

But would you have clicked on this video if he hadn't overstated the case against Dave Ramsey? It's typical clickbait. I don't think he understands that overblowing his critique hurts his own credibility more than it does Ramsey's.

[@mike73ng]

You’re soooo right. Dave is preaching to the financially unsophisticated. Sadly, that’s most of the population. So basically, Dave has designed his advice to appeal to most people. But you’re also right, one size doesn’t fit all. Ramsey is not for me.

[@davidmcknight8201]

Thanks for your comment!

[@stanhicks9431]

Each person’s situation is somewhat unique. Put into proper context you are both right. It would be better that you did not come across as Ramsey bashing. Your audiences are very different. Ramsey is trying to reach “financially unsophisticated” people as someone else has said, to help them get out of debt and build wealth. Those looking to convert to Roth where tax considerations are the priority are in a much different financial position. Ramsey is trying to change consumer behavior, not trying to be so much a financial planner/investment advisor. He obviously knows how to invest. The statistics of the percentage of people who live paycheck to paycheck, who have large credit card debt and do not have money saved for retirement are staggering…and sad.

[@thomasmoshier3920]

The problem I see with Roth conversions is if you convert at 22 or 24% then your effective tax rate at retirement is around 15%. RMD’s kick in and that might bump you up to around 20%. It ends up being about a wash.

[@DavidMcKnight]

Good comment. These types of conversions begin to make sense if you believe that tax rates, as many experts, predict, will rise dramatically in the coming years.

[@lewisautomatic]

Great video David. I paid the taxes for my first two Roth conversions with money from my savings. For my future conversions, I'll need to pay some of the tax from the IRA. For example, if I convert $100,000 in a 24% tax bracket ($24,000), would I be taxed $24,000 on the $100,000 converted and also be taxed another $5760 (24% of $24,000) on the $24,000 for total tax $29,760?

[@DavidMcKnight]

If you want to net $100k after tax then just divide $100k by 1-.24. That means your total withdrawal would have to be $131,578.

[@lewisautomatic]

Thank you. So if I elect to have the $24k deducted from the IRA I'm converting, the $24k will be withheld for taxes and $76k will end up in the Roth IRA. And just the $100k is taxable and not the $100k and then $24k?@@DavidMcKnight

[@edhurtado4784]

@@lewisautomaticThat is correct. Only the 100k is taxable, the amount withdrawn. You did not withdraw $124k so just the 100k is taxable income.

[@tacoontwo]

At the 5 minute 35 sec mark you say Dave Forbids you to do the Roth Conversion unless you have cash. I don't think you are correct with that statement. I just watched a video where he told one of his callers that it is perfectly okay to do the Roth Conversion and pay the taxes with part of the conversion but it is "Even Better" to do it if you have the cash on hand to pay the taxes.

[@DavidMcKnight]

Then he has an inconsistency with his message because that’s what he states on his website.

[@howardkenneth5569]

I think you are missing a key part. Dave said they have 100k in the Traditional IRA. So yeah it makes sense to convert about 71k this year and the rest next year to stay in 22% bracket. You would have been right to convert the whole thing in the 22 and 24% brackets ONLY IF it was the year 2025 and you knew the brackets were going up in 2026.

[@davidmcknight8201]

If these are the only tax-deferred assets they have (we don't know for sure), you would be 100% correct.

[@DanielHBuchmann]

You may want to put a windscreen on your mic.

[@DavidMcKnight]

Indeed. Sometimes those unexpected gusts come out of nowhere.

[@ReformedTryHard]

It’s 5 years from which you 1st opened a Roth account, correct? Not from the day of the actual conversion?

[@vchap01]

That's true for regular contributions. But each conversion has its own 5 year clock.

[@jayholiday256]

I’d only convert if I was pre social security and have quit work. We already have enough in Roth and brokerage accounts anyway

[@daviddavis6876]

When you are retired you need $14K if single or $28% if married of TAXABLE income. That is your standard deduction and is taxed at ZERO %.

[@DavidMcKnight]

Currently $29,200 or half that amount if you’re single.

[@ralphparker]

I agree with Dave about 90% of the time. What Dave is usually missing and you didn't get into it either is the process for deciding how much to convert if at all. I'd start by generating a forward looking Tax Plan. Then I'd model conversions to see how they changed my after tax net worth (ATNW) at my life expectancy ( I used age 85). In my ATNW, I devalued the Traditional IRA by 17% [ 12 % Fed tax + 5% state tax] to account for the fact that you can't get it without paying taxes on it. Your devaluation rate may need to be different, I would use your current tax brackets or the next one up. I'd start the process by maxing out the current level of Tax Bracket to see how that affected my ATNW and keep going until I maximized the ATNW. If you are both spreadsheet and financial savvy, you can do it. Else, you'll need help.

[@DavidMcKnight]

I discuss a lot of this in my upcoming book The Guru Gap.

[@JayRay9999]

Excellent advice!

[@dna95]

Thank you so much.

[@mrbigglesworth375]

What happens if you convert and pay all that "income tax" and then 10 years later the government creates a "new type" of tax... ie National sales tax for debt reduction? Thereby getting double whacked!

[@DavidMcKnight]

Not likely but would be get more than a few people voted out of office.

[@HA-iu1qt]

I just did a Roth conversion, I'm 31 so for me it made sense since the money will be sitting there for 20+ years

[@davidmcknight8201]

As long as you anticipate your tax bracket being higher down the road than it is today, than you made the right move.

[@nutria12247]

That will depend on the tax rate you paid now compared to what it will be in 20 years. The time it sits in a Roth does not matter. If the tax rates are the the same, it will be a wash.

[@kaseylv922]

@@nutria12247 Not really - any profits made on investments within the Roth can be withdrawn tax-free as well, so the time it sits in the Roth would matter if the money is invested wisely.

[@robertiola88]

Only one question Dave, with all the crushing regulation we advisors have to function under and the consequences of even minor errors being fairly severe, where is the accountability for Dave Ramsey when his followers are damaged by his advice?

[@DavidMcKnight]

I think accountability is coming soon given the Time Share Exit Team lawsuit…

[@robertiola88]

@@DavidMcKnight Good to hear. Eventually the chickens come home to roost.

[@dlucas527]

Great explanation.

[@davidmcknight8201]

Thanks!

[@QGJohn]

On the 5 Year Rule, I think Dave Ramsey also missed, if you have had a Roth IRA for more than 5 years, and are over 59 1/2, then you don't have to worry about the 5 Year Rule for Roth Conversions. "The second rule applies specifically to Roth IRA conversions and whether the 10% early distribution penalty hits pre-age-59½ payouts. This five-year rule doesn’t apply to new contributions to Roth IRAs but to conversions of pre-tax income from traditional IRAs to Roths. Under this rule, if someone under age 59½ does a Roth conversion, and later takes a distribution within five years of the conversion and before turning age 59½, then the amount of conversion principal that is withdrawn is hit with the 10% early distribution penalty. Once you turn 59½, you needn’t worry about this five-year rule, even if you take a payout before your conversion meets the five-year period."

[@DavidMcKnight]

There’s another 5-year rule you have to worry about if you do a conversion and you’re over age 59.5 and 5 tax years have not elapsed since your first Roth contribution or conversion. In that case you would owe tax on any growth you experienced on converted dollars.

[@QGJohn]

@@DavidMcKnight I already knew about the age of the Roth. Wife and I both opened up Roths when I was 43 and she was 40. So I just sort of blot out that 5 year rule, totally N/A for us.

[@QGJohn]

@@mwyoung152 This is NOT ACCURATE. I can't find the link but ask almost any financial advisor, including Andy Panko here. If you are over 59 1/2 and have had the Roth for at least 5 years, any 5 year clock has been met and is MOOT.

[@QGJohn]

@@mwyoung152 Well I did a bit of searching today and while I find articles from many advisors and even financial firms that back up the fact that the "conversion clock" is N/A if you are older than 59 1/2, I cannot find it on an IRS page. Perhaps one of the professional financial advisors who frequent this website could chime in and explain it, along with the applicable backing from the IRS rules.

[@QGJohn]

@@mwyoung152 OK, I did find something from IRS. Here is the link: www.irs.gov/publications/p590b#en_US_2023_publink100089543 If you follow the Flow Chart in Figure 2-1 and read the section after titled: "Additional Tax on Early Distributions" that pretty much makes it clear, if you've had a Roth for more the 5 years AND you are over 59 1/2, No Tax or Penalty.

[@wyzyguy726]

Ramsey does a lot of good. If he gets folks out of debt and saving money I can’t fault him too much. At that point you are probably savvy enough to get educated on the investment end. At least he is not a conman. What is a shame is the state of financial education… too many digging holes when they can’t afford a shovel.. a solid understanding of $ and taxation should be taught at schools… but then we would have a revolution and we can’t have that 😅

[@DavidMcKnight]

Thanks for sharing

[@ericgold3840]

Ramsey is a maroon, but I don't have a problem with his point that Roth conversions may bump a person into a higher tax bracket. That is obviously correct. Whether that higher tax bracket is still a Roth conversion sweet spot is a YMMV. If he was a bit more clued in, he would know to warn against other conversion costs like the SS tax torpedo or loss of ACA PTC credit. Those are potentially far more expensive than the jump from a 22% to a 24% tax bracket His declaration that Roth should only be considered if the taxes can be paid for with cash (post-tax money) makes sense if the 10% penalty applies. Since he does not clarify when that is the case, his advice is rubbish for those over 59.5 years old. His misunderstanding of the applicable Roth 5 years rules is pathetic. The correct answer is for everybody to open a Roth, the sooner the better. A $1 contribution is enough. Once 5 years have passed, then any conversion basis money in the account can be taken out whenever without additional penalty or taxes, and earnings can be taken tax free from age 59.5 I must say -- videos about Ramsey are unfortunate advertising for him. Better that he wither in obscurity, as befits his lack of competency.

[@DavidMcKnight]

But if ever there were a tax bracket you DID want to bump into, it’s the 24% bracket. His point would have been much stronger had he used as his example the 12 to 22 leap.

[@ericgold3840]

@@DavidMcKnight For sure. Fwiw, I didn't take his spiel as saying "don't go into the 24% tax bracket --- EVER!", but rather to just be mindful that Roth conversions can jump brackets. Woe to the person for whom that was previously unknown information, but his audience is ... well, let's just say unsophisticated..

[@ShadowZergling]

You seem like you're on some sort of vendetta against Ramsey and nitpicking small little details of arguments he's not even making. 1) He's simply giving an example of how to max out to the top of your tax bracket, not giving advice on which tax brackets you should be maxing - that is left to the reader to figure out depending on their own situation. 2) You're saying that he's saying because you can't pay a lump sum conversion with cash you shouldn't do it - which he probably would say is accurate, but what he's really saying is that it would be sinful to use tax protected funds to pay the tax bill and you should avoid this at all costs. This is probably also why he doesn't go on in example #1 to describe how you may want to not only fill your tax bracket but fill the next bracket above you as well because it just results in a larger tax bill to pay [with cash] which is much more difficult for the average taxpayer to do. What's most crazy is you understand all this, but you still chose this tone for the video. I don't like Ramsey either, but instead of just being an asshole and saying he's wrong wrong wrong just add the supplemental information you thought was important to add.

[@smb123211]

I don't really get all the outrage at DR. A quick listen to his show reveals that the vast majority are not thinking about derivatives, platinum futures or leveraged ETFs. No, they wanna get rid of the spouse, pay off a house or student loan or want advice on their child gone bad. We converted to Roth, paid the $70,000 tax over two years and have since made over $600,000 (tax free) trading actively with my financial advisor. The most important factor is a local FA who knows you and your details. A busy, disembodied person in some other part of the country won't cut it. I have lunch with my FA once a month just to catch up or gab about the kids.

[@TheDoglover1970]

So many of his listeners ran out of money years in advance of life expectancy? Could you share where you got the data of this claim? I did read two of your books so I am curious, were you an insurance salesman previously? Also, interesting that I just started looking at your channel, and I’ve already seen you trash three well-known people. To each their own, but you might get a bigger following if you would just stick to your own content.

[@DavidMcKnight]

I’ve been selling insurance as part of a comprehensive approach to tax free retirement planning for the last 25 years. And the gurus I critique are typically the ones that dispense paint by the numbers, one size fits all financial planning advice that generally is not appropriate for the disciplined investor. Someone has to point out the deficiencies.

[@snakesnarroz]

Hello, I was given the advice to have a traditional IRA so I can take the deduction now and dont worry about taking RMD's and paying the taxes later, bla bla bla. Basically I have had no financial advice ever from parents growing up, and what little I had turned out disastrous....i'll spare you the details. I've turned things around myself. My situation is I'm single, age 57, my IRA is approx 70K market value. I have other money in individual brokerage and a 401K from my employer. I don't own a house I rent, and find myself completely priced out of housing, which is another mistake but that's water under the bridge. I am planning to get married next year. My wife to be has small Traditional IRA as well about 35K. I'm in the 22% tax bracket, she is in the 12%. Bottom line is I know tax rates will increase in future, so it makes sense to do her Roth conversion now at her low tax rate before marriage. For my conversion I will remain in 22% tax bracket after marriage so it really doesnt change things. So my plan is do 100% of her conversion prior to marriage, regardless of painful tax burden for her, and then do a tolerable chunk of mine perhaps over 2 years. If you see any mistakes in my plan, please advise. Thank you!

[@DavidMcKnight]

Does she have any space left in her 12% bracket? For single people that bracket isn’t very big to begin with.

[@snakesnarroz]

@@DavidMcKnight Hi David, thanks for reply. New subscriber here and getting your book to read. Yes she does have some space left in her 12% tax bracket, but not much, it looks around 5K.

[@dougschepers8470]

Pay your taxes as you go, do'nt run your reg IRA up to begin with.

[@1dash133]

I agree with most of the points that you make against Dave Ramsey's advice. What's missing are WRITTEN examples that clearly show what you verbally state. That would make your points much easier for the general (financially unsophisticated) audience to follow.

[@soonerdad3]

Okay, so you don't agree with Dave Ramsey, so that doesn't make him wrong and you right automatically. I just don't get why so many of you Johnny Come Lately think that the only way to build your credibility is to tear down the man who has been helping people in the same space for more than 30 years. Please explain that to me!!

[@MOstix13]

Tax rates don’t feel low.

[@billbrowning8039]

Your forgetting irma impact on income over the limit

[@DavidMcKnight]

I have lots of videos on that if you’d like to check them out.

[@rollzolo]

Stop smiling Dave.... remember Mr Roper at Mrs Ropers flower arrangement class?

[@MM-ox4dz]

You are correct

[@DavidMcKnight]

👍

[@ChrisAbeytaTV]

Great job Dave

[@DavidMcKnight]

Thanks Chris! Hope you are well.

[@CXNTEAM]

Dave I love your Crocodile Smile! 😇

[@daviddavis6876]

24% taxes is 24% too high..

[@DavidsonFootball1]

You'd have to be an idiot to convert a 1MM IRA all at once - you'd be in the 37% bracket. And if you pay the tax out of the Roth, you're reducing the balance of the IRA, which is stupid because one of the biggest reasons to do one is the future tax free growth - in your example, only 700k to grow tax free instead of 1MM. At 8% in 18 years 700k would be 2.8MM, 1MM would be 4MM.

[@DavidMcKnight]

No one is suggesting to convert a 1MM IRA all in one year. Furthermore are you suggesting that if you don’t have the cash to pay tax on a Roth Conversion, you should NEVER do it? You do realize that most people have tax withheld from their IRAs upon distribution which is essentially the same thing.

[@DavidsonFootball1]

@@DavidMcKnight Then why do you say the taxes would be 300k? unless it's all at 24% and you live in a high tax state, the only way it would be 300k is if you went into the 32% or higher bracket. It's not 'essentially the same thing' at all. Presumably you are taking IRA distributions for living expenses so you can't avoid incurring the tax. If there's one thing people are less likely to do than pay tax on a conversion with outside cash, it's paying tax on a conversion, getting no disposable income out of it, and impairing future growth.

[@davidmcknight8201]

@@DavidsonFootball1 If you're in the 24% tax bracket in most states that have a progressive state income tax, you could easily be paying 6% state tax. So, that's an effective 30% on what you're converting.

[@thehfginc]

That's fortunately what he's allow to get away with.

[@DavidMcKnight]

Yes, unfortunately.

[@davidmcknight8201]

@@timtoolman9940 Ok, so it continues to grow within the account, but to the IRS's benefit. Your portion gets bigger but so does theirs.

[@ralfogle2480]

One can't withdraw from a Roth for 5 years from the date the Roth was first established without a penalty... despite one's age.

[@DavidMcKnight]

If it’s a Roth contribution you can withdraw principal day 1.

[@AJB-jj5qg]

Why are you talking so fast?!!! It's so annoying ,had to stop the video after 2min.

[@davidmcknight8201]

Well you missed out.

[@TM_Stone]

I had no problem listening to him. Hold on a minute, is this Senator Fetterman? Play it again with the CC on.

[@lord_woodhaven6426]

Ramsay's finanical advice is mostly for the very wealthy and most people listening to his podcast dont realize that. I couldnt agree more with Dave in this video that Ramsay makes content for a wide audence so his financial advice is too broad and useless to the average person. I personally think Ramsay just talks every day to make a buck regardless of the financial advoce.

[@DavidMcKnight]

My observation is that his advice is mostly for the poor and debt-ridden. Though I’m curious what evidence you might point to that he’s targeting the rich?

[@patrickkirby9265]

Ramsay's Advice is for the wealthy? I don't think we are talking about the same person. Ramsay's best attribute is teaching people who live beyond their means to stop spending and get out of debt. This is the lowest rung of financial literacy and planning. I have never agreed with Ramsay's investment advice but his plan to get out of debt and start building is solid and has helped thousands. One size certainly doesn't fit all. His advice is best and works for those at the bottom of the financial planning ladder. Once these investors get out of debt and get their feet under them, they can move on to more advanced techniques. Ramsay's failure, in my opinion, is that he does not acknowledge that his plan is elementary school and never graduates his listeners to the next level. I suspect this is purposeful to keep those on his program focused on the simple plan. It is possible that this level is all that some investors can handle. Unfortunately it's human nature to skip the basics and move on to advanced strategies. This would cause greater failure rate at the bottom for those Dave is trying to help the most.

[@timmckee8287]

I have no idea who this guy is. Why should I pay attention to him?

[@DavidMcKnight]

Because I’ve sold 500,000 books on the subject?

[@timmckee8287]

@@DavidMcKnight Compared to how many sold by Ramsey? Not so many. It’s easy to get attention by criticizing Ramsey. He’s the guy about whom most people know.

[@davidmcknight8201]

@@timmckee8287 Ramsey's books are about getting out of debt. Mine are actually about Roth Conversions and having a tax-free retirement. You asked the question. I'm just giving you the answer.

[@timmckee8287]

@@davidmcknight8201 Perhaps. Regardless, he has the name recognition and the audience reach. The issue is the drama of asserting he’s “dangerously wrong.” Have a good one.

[@davidmcknight8201]

@@timmckee8287 He's sold millions of copies, way more than me, but they're all about getting out of debt, not Roth conversions. That's like saying you should follow J.K. Rowling's advice on Roth conversions because she's sold more books.

[@richardkmendelson4004]

People who follow Dave Ramsey have no debt and lots of cash. Sounds like only 5% of people who listen to you have enough cash 😂

[@DavidMcKnight]

You’re actually precisely 180 degrees wrong on this.

[@came7494]

Ramsey is so dangerous to our profession.