How to Prioritize Roth Conversions and Subsidies for Early Retirement!

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Күн бұрын

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@seang414yt 11 ай бұрын

Excellent video on a topic that does not get enough coverage (no pun intended). I would love to see you make a video on the converse scenario that you cover here-- early retirees who elect to do Roth conversions in order to *qualify* for ACA subsidies (rather than sacrifice the subsidies). For early retirees sitting on a multi-year cash cushion and whose withdrawals from retirement accounts will be largely cost-basis, their taxable income would be close to zero. Roth conversions could be used to avoid going over the ACA "Medicaid cliff" in early retirement. I would *love* to see you talk about this strategy in a video. Keep up the great work.

@earlyretirementari 11 ай бұрын

Thank you and added to my list! Nice pun :)

@RetroPath7 10 ай бұрын

Great topic! Thank you for the detail provided, it is tough to find this info on this exact topic. With a taxable brokerage account that is more than our IRA/401K retirement accounts, this has always been at the forefront of thinking of early retirement. While we haven't called it quits just yet we are close. We will have relatively low income (only dividends and capital gains from selling), and we will have to "blend" in Roth conversations to bring our income up to quality for the credits. An interesting topic would be the different levels of income (combined income and conversions) you can show and the effect it would have on the ACA subsidies. Keep up the great work!

@phillipbunker9017 10 ай бұрын

Really well thought out content backed by numbers. I will be watching more of your videos.

@earlyretirementari 10 ай бұрын

Pleased to hear it!

@stephtraveler7378 2 ай бұрын

Great work. This is one place RightCapital falls short. There are also the impacts of IRMAA (2 yrs look back) once you hit 65.

@JessCretney 26 күн бұрын

Great video and information. One thing to consider is that the $65k saved in the first 3 years of retirement compared to several $100k of savings from Roth conversions is not apples to apples. Since that $65k would grow throughout your retirement it could easily triple or more based on investing and the gains over that 30+ years of retirement. Just another layer of consideration in the complex game of Roth conversions

@avizcaya9263 8 ай бұрын

I just discovered your channel the other day. This is GREAT information!

@earlyretirementari 7 ай бұрын

Glad you found my channel helpful!

@gizmobowen Жыл бұрын

Hey Ari! Thanks for the video. It's an interesting exercise to look for the gaps in your income to put in some ROTH conversions to mitigate long term tax burden from RMDs. What I am considering is a different strategy. I hear all about the go-go, slow-go, no-go income model and it seems appealing. For mean this translates into just spending a lot during early retirement, then not as much later on and then when I get to RMD age, my portfolio isn't so huge that the RMDs are way above my living expenses. If I can make my RMDs align with my expenses, then I don't expect any excessive tax burden. How about a video on trying to make that scenario work out?

@earlyretirementari Жыл бұрын

I’m glad - I’ll do a video for your great question!

@jeffb.2469 6 ай бұрын

Sounds like a good plan.

@jameschaves5723 7 ай бұрын

Brilliant video Ari. I always knew that taking the subsidy vs. Roth conversions was tricky. This is on another level. I’m going on 54 and will need health insurance. You now have me thinking about what to do?

@earlyretirementari 7 ай бұрын

Glad it helped. Reach out to Lyndia as step 1 to help with the health insurance calculation (see my episode with her under popular as it’s my second most watched episode)!

@PH-md8xp Ай бұрын

My plan is to prioritize ACA subsidies until I’m on Medicare in 5 years, then generate my living expenses from a combination of my trust account + my traditional IRA so that 10 years later, when RMDs hit, they will provide what I need to live on without pushing me into high tax brackets and IRMAA surcharges. No need for Roth conversions as I see it right now. That said, this is something that needs to be evaluated annually.

@earlyretirementari Ай бұрын

@@PH-md8xp not a bad plan.

@ericgold3840 5 ай бұрын

Ari used future dollars in his presentation. This is apparent from the non-zero slope of the tax bracket lines. I'm skeptical about the analysis because it does not compare like with like. First, nothing prevents the taxpayer from instituting a Roth conversion strategy from age 65 instead of from age 62. The net benefit will be less than $250k, but quite a bit more than zero. Second, I'm not sure what growth rate Ari used, but e.g. if we use 7% then the $65k of ACA subsidy becomes 65000*(1.07)^30 = $494,00 in 30 years. If we put that ACA subsidy into it's own investment strategy of 100% equities and expect historical returns of 10%, it grows to $1,134,000 before LTCG and DIV taxes. I'm not saying that it cannot make sense to skip the ACA subsidy, but this example when correctly analyzed would come very much to the opposite conclusion. As a side comment, the more I play with financial planning, the more I am impressed by how much money seemingly small differences in assumptions or analytical errors can make.

@miatafunrun3078 Ай бұрын

Agree. He should have used the ending balance as a measure since that takes into account the growth of the $65K extra you would have invested.

@markianhawryluk3664 Жыл бұрын

Thanks, Ari! Much appreciated!

@earlyretirementari Жыл бұрын

You’re welcome

@MyFinancialJourney2027 6 ай бұрын

Can you include a case study of clients planning for early retirement who have kid(s) and the order of withdrawal from their retirement accounts (401K, pension, ROTH, etc) and the tax implications involved for retirees and their kid(s). Thanks.

@kaytee1617 9 ай бұрын

Great illustration of the pros and cons. Thank you.

@earlyretirementari 9 ай бұрын

You’re welcome!

@talltodd 9 ай бұрын

You need to compare the present value of the $293,782 to the $65k subsidy savings.

@michaelsyoutubechannel5857 4 ай бұрын

Excellent point @talltodd. Choosing not to convert into a Roth IRA and instead allowing that $65,000 in ACA subsidy savings to compound at 7% over 30 years adds up to over $500,000. So the comparison is more accurately $293,782 in savings by doing a Roth Conversion (in 30 years) vs $500,000 in savings by taking advantage of subsidies (30 years later). This is another excellent video by Ari and wisely does not attempt to imply which strategy is best for everyone. It very accurately points out there are a variety of individual factors that will impact this decision. Some of which are predictable like RMD's and IRMMA, and many that aren't predictable such as future market returns, individual life expectancy, and future tax rates. I think a big part of this decision comes down to the personal choice of felling more comfortable paying low taxes early in retirement to preserve your tax deferred 401k and IRA balances and taking advantage of ACS subsidies. Versus being willing to pay higher taxes earlier in retirement and sacrificing the ACA subsidies in order to be able to count on tax free income later in life from your Roth IRA.

@josephjuno9555 Жыл бұрын

GOOD Video! I was think about Roth Conversions next yr but this shows the Subsidies are more important to me! I have $350K so RMD won't really affect me?

@earlyretirementari Жыл бұрын

I’m glad! Most likely for your situation , yes :) I’d prioritize subsidies

@OHDANB Жыл бұрын

Hi, Ari. I was so surprised to see my comment was the basis for another one of your helpful videos. Thank you! I have watched it a couple of times now and will watch it a couple more times. I'm thinking I may "pay" myself more in 2024 and 2025, selling off a portion of my taxable account, and doing some minor ROTH conversions, to fill out the 22% tax bracket. I'll have to pay full price for my ACA plans in those (2) years. I've been living so frugally since retiring in 2017 to avoid that subsidy cliff, I feel I've been cheating myself out of living a better early retirement. My 2024-2025 strategy will help fund a much less frugal lifestyle for the next few years. Then I can focus on keeping my income low for that IRMAA look back period before taking Medicare. Once on Medicare, I'll start doing more ROTH conversions. Thanks again.

@earlyretirementari Жыл бұрын

@@OHDANB you are very welcome. Please don’t cheat yourself on what you’ve worked so hard for.

@eastwestpicayune8200 10 ай бұрын

New subscriber. Good video. Very informative. This is the dilemma I'm in right now. My calculated RMD at 73 will be around 82k. I was told by a couple of advisers that conversion may not be a big difference. My thought is to take the ACA partial subsidy and slowly convert at the same time. Don't have a lot of qualified money to pay the taxes for the conversion. Withholding taxes from my conversion doesn't make sense. Your view will be much appreciated.

@nutria12247 Жыл бұрын

We are looking to retire around 55 and will begin pensions at 57. Thinking of using income from 403b using rule of 55, but still want to keep withdrawals low enough to take advantage of the subsidy. Looks like $35,000 or less would still give a good subsidy. Then would fill the rest of our income needs from a brokerage account. So we would not do Roth conversions. Does that seem to be a logical plan? This is just for the two years until our pensions kick in. Then will need to adjust the plan a bit.

@alk672 21 күн бұрын

I wonder how frontloading the risk factors into this analysis. Sure, we can pay more taxes or pass on ACA subsidies now, and that will give us more money in our late 70s if everything goes well, but if the market is really bad we are really pushing it short-term, aren't we?.. We may not be there financially for those gains to materialize.

@chrismccarthy1535 2 ай бұрын

The $300K+ is after 30 years. The $65K savings is in the 1st 3 years. What would this $65K grow to after 30 years? Wouldn't this be the better comparison?

@miatafunrun3078 Ай бұрын

Agree. He should have used the ending balance as a measure since that takes into account the growth of the $65K extra you would have invested.

@philcannizzaro7512 Жыл бұрын

Great food for thought. Question though - you show this couple as having no real spending before age 65. They're not just living on their $50K until 65 and then jumping to $100K. How about this for a plan - stockpile cash in the couple of years before early retirement. Then exercise Roth conversions to get just above the Medicare limits and take the full healthcare subsidy. At today's interest rates it's not a tough decision to leave money in cash. You can maintain whatever lifestyle your cash reserves will allow at practically $0 of AGI. Since you need to stay above the Medicare limit to take part in the healthcare subsidies, you then do Roth conversions to generate just enough MAGI to take full advantage of the subsidy. Best of both situations.

@earlyretirementari Жыл бұрын

Great points Phil! Big fan of building cash reserves for an early retirement for exactly what you mention above. The plan does assume spending through age 65. See description for details. Roth Conversions to take full advantage of the subsidy is the win-win 🥇

@paulscheuer9455 9 ай бұрын

Question: if I take a distribution from a qualified account as my only income source for the year, are there any restrictions in converting 100% to ROTH (and of course paying the conversion taxes) to force a $0 ACA premium (maximizing the subsidy) within the same year?

@drdrew-wq9oh 8 ай бұрын

You are not considering cost sharing for the lower tier income levels. This cost sharing reduces the OOP max and deductibles and makes the insurance much better.

@earlyretirementari 7 ай бұрын

Great points! Lots to cover and we'll add that to the next episode

@johnlollis9204 7 ай бұрын

Even better, begin conversations sooner, like between 58-60, retire with min. Income and still quality for aca subsidies.

@earlyretirementari 7 ай бұрын

Yes!!

@coptops621 4 ай бұрын

It seems like a better example for the ACA approach would involve taking the ACA credits until 65 and then optimizing Roth conversions from 65 to 75. This would probably reduce the $245K advantage of the Roth conversion approach and be a more realistic approach.

@hm51008 4 ай бұрын

Good point. Assuming the traditional IRA continues to grow, by the time you start doing Roth conversions you will have far more to convert, and therefore more tax. The only way to know for certain is to run multiple calculations which are very complex if you don’t have the appropriate software.

@EnrichoArrenado 4 ай бұрын

@@hm51008 This was the most difficult question when I started early retirement. I had to run the numbers in an Excel model for someone that is 62 years old and has 3 years of potential ACA credits. One key factor is the dollars saved from 3 years worth of ACA credits that could be reinvested plus the delayed dollars that would be spent for three years of tax payments for the Roth Conversions that could not be invested. The drawback as you stated is that the pre-tax balance is growing for three years and will potentially increase future Roth conversions and taxes. For my estimator with my factors I came out slightly ahead with the ACA credit route and I was saving current known dollars for future potential dollars (one in the hand versus one in the bush). However, there are so many impacting factors that went into the model that it was hard to come up with a standard rule for making a decision. I do think the hybrid approach with just delaying Roth conversion for 3 years potentially makes more sense to analyze versus assuming no Roth conversions which is probably not an optimal option.

@EnrichoArrenado 4 ай бұрын