How Much Should You Roth Convert? (The Higher Your Income, The Trickier It Gets)

[@Cottoncandyh]

I'm 27 and just maxed out my ROTH IRA for 2024! I feel a bit behind for taking this long to get on track. Now, I'm wondering-what's the best way to invest this money to maximize growth for retirement?

[@peakretirementplanninginc.]

Congrats on taking advantage of the Roth IRA contribution limits! If the goal is using the funds in retirement we would encourage you to utilize well-diversified index funds (Something like a Vanguard S&P 500 fund) that have a low internal expense ratio to keep costs to a minimum. Since you have a long time horizon, you can invest for growth, especially given the fact that Roth IRAs have the advantage of tax-free growth.

[@SteveH-FranH]

Software for conversion is really good, but it’s the analytics that Peak provides that crunches data and information into knowledge for tax savings, tax planning, Medicare, investment, etc. Their team strategically limits the ole garbage in/ garbage out dilemma with software!!!

[@erickarnell]

Taking into account planned qualified charitable distributions (QCDs) is important in our case, to not convert more than necessary. We want to leave a planned amount in tax-deferred accounts.

[@dlpharmd]

Good morning how do I set up a 15 minute consult?

[@ralphparker]

Good Video! I'm surprised you didn't show a Forward Looking Tax Plan (FLTP) which helps to show when you should be making a Roth Conversion or maybe delaying SS to withdraw income from your IRA. FLTP helps you see how much conversion helps and when you get into the too much brackets as it shows impacts for the years down the road. But managing Social Security, Capital Gains, IRA distributions, Roth conversions are tough hand calculations. But I like to maximize the After Tax New Worth when deciding to make Roth Conversions since pretax net worth is a misleading metric when tax deferred accounts are in the plan. Also, the benefit of Roth conversions shows up when you can avoid the Social Security and Capital Gains hurdles along with the IRMAA adjustments later in life when the RMD's kick in.

[@peakretirementplanninginc.]

We agree that to do the calculations by hand would be a bit cumbersome which is why we allow our advanced software to do the heavy lifting for our tax planning😊

[@ThomasManning-cm6ez]

I retired from teaching in NC 2 years ago and get about 35K in a pension right now. I took a new job with a 401K and I have been pumping 2.4K a month in it. I have 50K in a roth also. My wife is in higher Ed and is a few years away from her pension. It will be around 70K. I plan on working my current job about 2 more years which should put me close to 100K in that 401K. So my 1st year not working I will show 35K from the pension. I plan to file separate from my wife and plan to max out that (12-15%) tax bracket and roll close to 25K per year into that Roth before taking Social Security. Does that plan look solid?

[@johnyjsl9219]

I don’t understand why then purple tower jumps after 50k, but then drops at about 75k. Why would the tax rate drop after income exceeds 75k?

[@peakretirementplanninginc.]

The “purple” you see is the Social Security benefit taxation. Part of the reason you see it jump is due to the increase in the ordinary income tax you see in blue. The other reason why it jumps is because at that point, Social Security becomes fully taxable due to other income.

[@jaynelson8304]

One thing you didn't address is the cost of lost growth on taxes paid to convert. If I follow your advice and convert to the 24% bracket I would pay $35,000/year for five years. Compound that for 15 years and you have almost $500,000 of growth. That will pay a boatload of taxes!

[@nunuvyurbiz123]

Well, no, because you owe that money when it's pre-tax too. Your pre-tax account is just Roth plus taxes you owe. So if you don't convert, the 35K would grow but when you eventually withdraw funds the taxes you owe would have grown too. It's a wash. All that matters is the tax rate, now vs later.

[@peakretirementplanninginc.]

While you may have $500,000 of growth, you have to remember that that $500,000 is not all yours. If you are in the 24% bracket for example, and you add this $500,000 to your already existing account balance, what happens in most peoples case is, once they add together their RMD, Social Security, maybe a pension in their as well, you will end up in a much higher tax bracket than had you converted on the smaller amount, which will cause you to pay more in taxes overtime. And the most important thing to remember is, once the conversion is done, the your Roth account grows completely tax free from that point forward. The concept breaks down as simply as, would you rather pay taxes on $100 today at lower tax rates, or $100,000 tomorrow at higher tax rates? Keep in mind also, at the same rate of return and same tax rate you would end up with the same account balance whether you did the conversion now or didn't when factor in taxes... $100k today at 24% tax equals $76k.. If the investment grows at 7.2% over 10 years then you end up with $152k... On the other hand if you dont convert and get that same 7.2% growth over 10 years then you have $200k... But after taxes at 24% (assumed same rate but could be higher in the future) then you would still have $152k.