How To Take Advantage of Roth Conversions

[@MrGoodaches]

So often in my life I've been frustrated by "professionals" that can't even comprehend my questions. What a pleasure to be finding Mr Conole's videos. I'm discovering that he already knows the questions and has already prepared clear answers to those questions.

[@RootFP]

Thank you!

[@helenwood3199]

James, I want to employ your strategy for conversion to ROTH and stay under the 24% tax threshold. As I have attempted in the past, the unknown variable, throwing a monkey wrench into the process, is the annual gain on my brokerage account. I don't get that info until after December ends, but must determine the conversion amount and activate the trade before the end of the year. I'm not comfortable making a best guess. Any suggestions?

[@heidikamrath1951]

@@helenwood3199Great question! I’m not retired yet, so I can’t answer it but I sure hope James addresses it in the future.

[@cherishgp]

@@helenwood3199My situation as well

[@TonyCuratolo]

If you buy stocks & don’t sell them, there’s $0 gain in your brokerage. You control the gains.

[@anthonygardner400]

James, I just found your channel and want to compliment you. You not only provide excellent content, but you're an excellent communicator who is great in front of the camera also. This combination isn't easy to find. Best wishes on growing your channel!

[@RootFP]

Thank you, Anthony!

[@dbest4755]

i second that motion...

[@DB-xp9px]

nearly every video by every CFP uses examples where it's a married couple that usually have so much cash around that they have way more flexibility w/ how to use their tax brackets, whether to do roth conversions or to maximize health care premium credits or to wait around for SS. would be nice to see some videos that occasionally talk about a single person heading into retirement and w/o a mountain of post-tax cash reserves.

[@helenwood3199]

Yes, please. Use more examples for single folk.

[@sandylamba2546]

Thank you for this terrific video. I am in a similar situation and was seriously considering Roth conversions immediately upon retirement in the future. I am planning to maximize the 5 year window between retirement and taking social security and utilizing those 5 years to do Roth conversions. Your videos are an excellent source of information and your delivery is very professional and personable.

[@RootFP]

Thanks, Sandy!

[@juliehoward2618]

First, I love your videos, and I wish you all the success in the world. I’d like to point out that once you reach a certain taxable income, the premiums on Medicare increase as well. It has been my experience that the healthcare nuances don’t seem to be addressed when looking at money and I think they should be. Thanks again for all of your wonderful videos and I hope this helps.

[@RootFP]

Thanks, Julie! Yes, there are healthcare nuances as well. I may do a video on that in the future

[@captrandy3307]

Great video James. I'm starting to have more interest in your content as a semi-retired DIY type of person. My approach is to use an MS-Excel spreadsheet to simulate the possible outcomes using whatever assumptions I want, and they are all generally conservative. Yes, it gets very complicated and the golden rule applies - "garbage in equals garbage out." By creating these videos you are providing valuable information for anyone to take advantage of. Keep the videos coming. I will have to check out you pod casts next. Bravo!

[@RootFP]

I’m glad you found it helpful!

[@comingshortly]

The State tax point is a good one. I currently live in MA which fully taxes 401k withdrawals at 5% but I may move to Florida in retirement. Therefore my federal rate during RMDs would need to be 5%+ higher to make a conversion pay off. Yes, there are IRMAA and widow trap and heirs to consider, which boosts the case for Roth, but also time value of money, which cuts the other way. To help minimize RMDs, I prefer withdrawing more than needed prior to RMDs and investing in a brokerage account, where I can defer gains indefinitely, take $3k per year of tax losses against ordinary income, and my heirs get a step up in basis and don’t have to liquidate the account in 10 years.

[@patrickdennis5209]

Excellent content and well presented. Starting the Roth conversions this year with plans to do so for the next 11 years (currently 61). Thank you.

[@RootFP]

Glad it was helpful!

[@margaretmarshall3645]

You might want to convert extra this year and next. Once you are 63, conversions can bump your income up to where your Medicare premium increases when you turn 65. The under-63-year-olds have the advantage of not having to consider IRMAA rules (except to plan ahead).

[@RootFP]

@@margaretmarshall3645 Great point!

[@Jack51971]

Why not convert it all at once?

[@SunAtNight731]

For me, the right answer was starting Roth conversions as soon as possible while my *balance is as small as it will ever be, to avoid having to pay taxes on a much larger balance. The couple in the example would have been so much better off, in my opinion, doing Roth conversions or other tax planning before their pre-tax balance grew to 1.9 million at age 61. With that much money, and only 11 years before RMD age, I can see why the writer was concerned. James, could you address in a future video, how to determine the best time to make a Roth conversion, as well as how to determine how much to convert. Waiting to retire and be in a lower tax bracket, for some of us, would mean allowing our balance to grow for 20 years, potentially doubling twice and becoming unmanageable.

[@Post4JM]

Great suggestion!!

[@doreendevine1030]

Just found your channel and it’s great! Smart,concise and informative. Thank you!!

[@poolmilethirty2859]

Thank you, Janes. You explained things in a very understandable way, and i love the written paragraphs and scenarios you put up on the screen.

[@louiegiambattista7593]

Excellent info James! Thanks. Additional info that would be helpful is to include the Medicare taxes in the different strategies.

[@VanTran-hr9iv]

Just found out your channel, love it . Thanks! for all good information you share with, looking for more in future.

[@RootFP]

I’m glad you found it! Thanks for watching!

[@Gregarious3]

Going to nudge $7m networth soon, $4 in rental property, $2m in 401Ks. At some point you just have to pay taxes. I am figuring 15% conversion to Roth at 59, then 15% plus the previous years tax debt the next...and so on. Be damn the taxes, we will have plenty live on, rental income from 6 households will cover a good life already.

[@JBHIII]

Thank you James the information you are providing is what I need to navigate my retirement.

[@Dannsandiego]

Your presentation was incredibly helpful. Thank you.

[@KSigsGolfer]

James - I've stumbled across a few of your videos recently and have enjoyed them. This video was very helpful for me. Subscribed! Keep up the good work!

[@Kate-fn8rj]

Great video!

[@christaylor8022]

Thanks James for another great video. My question is this. Do the same strategies for IRA and Roth IRA conversions apply to 401k and Roth 401k conversions? Thanks again!

[@RootFP]

Yep!

[@sheldonfields8834]

The question is at what AGE do you begin this conversion process. If I work until say 63 that gives me only 9 years to do conversions until I hit RMD at 72. If I understand your video what until I retire when my income will drop (I am high income earner now) and fill in the gap years before I hit RMD with roth conversions?

[@RootFP]

It's not about the age as much as it is about your income. It usually makes sense to consider Roth conversions in years where taxable income is low.

[@Elephantine999]

Another great explainer. Thanks.

[@BadPhD777]

Just found this video - WOW!! Very informative! Time for me to crunch some numbers!

[@RootFP]

Glad it was helpful!

[@georgemarsilio5122]

this man talks the right info

[@robertryan3490]

Do you think another strategy is keep bonds and fixed investments in the tax deferred accounts, keep stocks in ROTH and taxable accounts. By doing this your tax deferred account should not grow too large?

[@RootFP]

That's another good way to think about "managing" the size of your pretax accounts that would be subject to RMDs.

[@harpomark5468]

Qllp@

[@daveschmarder-US1950]

I've been doing this for a few years now. I wished I had done it earlier. But it isn't a big problem as my traditional IRA is less than 15% of my portfolio and my RMD starting next year is very manageable. But I highly recommend it, if it makes sense to others in their plan.

[@pauldewey3938]

Excellent information and explained so clearly!

[@4403323]

Now, I finally understand why and how to do Roth IRA conversions so I can pay less tax in my retirement.

[@RootFP]

Glad it was helpful!

[@janethunt4037]

Great presentation! But I'm concerned about taking the 12% out now if I do a Roth conversion, then 12% is gone and not growing for the next 10 years or so. It's probably still the best thing to do to fill the 12% bracket. I will run some numbers.

[@howellwong11]

I imagine that you don't have to report the gains or losses when you trade your Roth's stocks. It makes for a simpler tax return.

[@RootFP]

That's correct!

[@johnanthony6191]

very well explained, Well done

[@jacobkowski7705]

I wish an example case is more relevant to average Joes. If I have a retirement income of $300k, I wouldn’t even bother to watch KZbin, but just enjoy my retirement life. I mean, even with a terrible tax strategy, I will have more than enough remaining 😂 Getting $90k just from SS? Wow. I just envy that 😅

[@sylviat8461]

Agreed!!!!!

[@jpsmusicandmore5457]

Am I correct? When you convert to a Roth don't you have to leave the money for 5 years before you can use it? Great video thank you.

[@RootFP]

You're alluding to the 5-year rule. Check out the article here: www.unionbank.com/personal/financial-insights/investing/retirement/what-is-the-roth-ira-5-year-rule-important-guidelines-for-withdrawals

[@JC-21470]

Anyone in the position of the example here is well... let's just say "not worried". Good grief, give me a break and use some examples that are closer to reality for many of us. Love the channel though, so keep up the great work!

[@Kamdorian]

What happens to the traditional IRA account after you transfer the money into the Roth account? Does the traditional stay open? And every year do you repeat this process of funding traditional IRA with non deductible contribution first then transfer to Roth?

[@philip5899]

So say I convert $50k of current value but with a cost of $100k, do I pay tax on the value of the conversion? What happens to the capital loss of $50k?

[@michaelcoglianese4292]

IRA or 401K conversions are great but you still need money to live on. In this example they convert $40k out of about $105K income. This leaves them $65K (minus the taxes on $80k) to live on, which may not really be enough to be able to enjoy your retirement

[@RootFP]

Yes, you are correct. In some cases I’ll encourage people to build up cash or non retirement accounts before they retire. That way they can pull from those accounts with little to no impact to their taxable income.

[@Gregarious3]

The referenced people were in good shape to do anything.

[@PH-dm8ew]

So, when calculating the future tax rates and RMD, don't we need to account for the inflation adjusted tax brackets 10, 20 30 years from now?

[@earthling808]

$41,050. conversion to Roth IRA? Is there no longer a $7000. limit per year when you retire?

[@RootFP]

The $7k only applies to contributions. There are no limits on conversions, but any amount you convert is taxable.

[@earthling808]

@@RootFP Ok, that is the information I was looking for. And can conversions be done before we retire?

[@johnbeeck2540]

Don't forget you might create an IRMAA cost penalty too if you get into higher income thresholds...

[@helenwood3199]

In the case study, the couple had chosen to wait to 72 to start collecting SS. IRMAA would not affect them yet.

[@JohnJohn-nt9mf]

Quick question. Can you do Roth conversion even before 60 yo??

[@Post4JM]

Yes anytime

[@randynelson3862]

Outstanding explanation.

[@RootFP]

Glad it was helpful!

[@electrified7309]

All of these people are in a different world than me. If i had this kind of money i wouldnt have a worry about anything. My question is i will have everything paid off by the time i retire. If i dont plan on being in these high tax brackets why would i need to convert my 401k to a roth. I only have 200k and 15% is in a roth ira and i plan on retiring at age 60 so i will be using some of my 401k for a few years tell i start recieving social security. I'm 54 and plan to retire in 6 years.

[@mlee1308]

I have $4 million in trad 401k, 57 yo, and wife just retired at 55 yo. I also have an inheritance IRA worth $670 k which needs to be taken out in 9 years. I just realized I need to start doing Roth conversions ASAP. Starting by end of this year. Now to balance between the 401k and inh ira. Thinking $100 k convert, $30-40 k from inh ira. I will try to top out at 24% tax bracket to Do this. Still working 7 days a week like I have been for the last 34 years. Not sure if I should retire next year. Both have pensions. Realized I should take soc security has late as I can because if Roth conversions. But I can’t convert enough to really being the 401k down by the time I’m 72 when rmd kicks in. The inh Ira will be too also, I have it all in Tesla stock. Net worth is about 7 million, stocks, cd. Not property. I’ve been saving my whole life, pretty frugal, now I have to spend all my spare money on the Roth conversion and still can’t bring it down. I always wanted to just blow my money when 8 retire, but still back to square one, Not much cash to spend on myself . Should I do a lump sum at one point?? Huge conversion? Earlier in the game? I want to convert so it can pass to the three children also, besides rmd. I thought retirement would be good, but now I have tax issues that I’ve been worried about.

[@RootFP]

There are a lot of variables that you should be accounting for with this particular situation. I would say to reach out to your CPA or financial advisor if you have one because there's not a simple answer without understanding more of the details. Feel free to reach out to us if you'd like some guidance here. Also, and you may already know this, but you cannot convert an inherited IRA. You must take that as a distribution which creates some unique planning issues/opportunities for you.

[@howellwong11]

@@RootFP Good advice.

[@akapam57]

With all you have you are actually coming on KZbin to get that answered? That's crazy

[@larryjones9773]

Keep working. The IRS will love you. Somebody has to pay for the infrastructure bill.

[@cruisepuppy]

One question...Can the taxes be taken out of the amount you want to convert - or do you have to have cash to pay the tax on the amount you want to convert? For example, if I want to convert 100,000 at the 22% tax rate, would the taxes be taken from the 100K and 78,000 be put into the Roth account, or do I have to come up with 22,000 in cash before I can convert the 100,000?

[@RootFP]

You could do either. But if you’re under 59.5 and withhold taxes from the conversion then that amount is considered an early withdrawal and subject to penalties.

[@cruisepuppy]

@@RootFP we are 65 and actually already retired. We could do more each year if we can take it out of the converted amount and didn't have to come up with the cash to do it. Is that what you would recommend?

[@Post4JM]

Great question

[@gman1550]

What is taxable savings?

[@RootFP]

Savings that isn't in a 401k, IRA, or any other type of retirement plan.

[@allsportsexpert]

The only problem with the conversion is you will have less money (after paying taxes now) to grow the amount you will have in a few years. The 22% tax that you pay now you will have 22% less money to grow from now on. When you retire in a few years, even if you are in 40% tax bracket, you still keep 60% of the grow if you do not convert now.

[@dstaff4134]

Roth IRA and 401ks are still part of the market and will continue to grow as long as you keep the funds active and not in the money market, correct?

[@helenwood3199]

The money you convert will continue to grow, but blessedly tax free!!

[@jaquevius]

Perhaps a dumb question, but how does the money in the brokerage account fit in? Since it is put in post tax, and you pay taxes on any gains each year, I assume it’s basically like your savings account and you can spend it freely without it affecting your tax calculations? In your example he was living on 40k a year and converting IRA to Roth (which you obviously can’t spend). Could he also spend as much as he needed from his brokerage accounts and not affect his tax liability?

[@RootFP]

In your brokerage account you pay taxes on interest, dividends, or realized capital gains. So the amount you pay in taxes would depend on the growth of the investments you were selling to live on.

[@davidwarnke5990]

But basically you are correct, no tax on cash!!

[@jbro6236]

Congratulations you just alienated 95% of us who are not in the single digiters. How about making these discussions more realistic to most of us?

[@michaelvadney5803]

I did enjoy this video. Thank you. Peace of mind is worth a lot to me. I think about moving my deferred tax account, TSP of a $1M+ over to a brokerage acct for a year or so and then possibly pull all of it out at a capital gains rate and just be done worrying about the tax burden from the retirement account.

[@davidparker7156]

when converting roth should you also stay under the Max capital gains limit, given you are using money from that account?

[@franks5553]

The reason why these KZbin advisors often have examples of wealthy people's finances is because they cater to wealthy folks and want their business more than the average person.

[@josephj7991]

You chose poor example for common people! Too Rich, no state tax ect! Pick someone much lower to help more people!

[@RootFP]

Hi Joseph, usually (although not always) Roth conversions make more sense for people who will be in higher tax brackets later on in retirement. If someone expects to be in a low tax bracket due to their income then there might not be a good reason to do a Roth conversion.

[@johngill2853]

@@RootFP unfortunately I don't think people know in general Roth, Roth conversions and RMDs are a problem for people with large retirement accounts or other income like a large pension. If you have any where near median/average retirement savings and no other income your tax bracket will be low.

[@Post4JM]

I agree with James.

[@TC.....]

avoiding is tax is like stealing from other taxpayers. PAY YOUR FAIR SHARE OF TAXES. We need the money to maintain road, pay for welfare receipients, and help our migrants friends.

[@datbio7302]

Idiot! If you find a bargin, would you rather pay the full price?