Roth Conversions and Chunking Before Year End

Roth conversions remain popular as many fear that tax rates will only increase in the next few years, so why not convert now at lower tax rates and let the account grow and come out tax-free at retirement. Remember, if you have a traditional IRA or 401(k), then that money grows tax-deferred, but you pay tax on the money as it is drawn out at retirement. If you have traditional dollars where you obtained tax deductions for those contributions, you then have to pay tax on the amount you want to convert to Roth.
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About Mat Sorensen:
Mat is the leading national authority of The Self-Directed IRA industry, CEO of Directed IRA, partner at KKOS Lawyers, and best-selling author of “The Self Directed IRA Handbook,” with 40,000+ copies sold. Mat is also a VIP Contributor at Entrepreneur and, an expert author at Cryptopedia. He is a go-to guest speaker for financial, tax, and legal podcasts, Live events, and conferences.
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[@nevido84]

God bless your mom Mark, as I watch this with my notebook in front of my laptop and hear you talk about opening a trust for your mom and fund Roth IRA and I looked down on my notebook for To Do Lists and I had it listed at the top. :) You made me laugh!

[@mirzajoldic1395]

i love this stuff. pure gold

[@thomashowells6337]

Thanks for the clarification that you cant take the taxout of the Roth. I heard it 100 times but...The subtlety is you loose the money from the Roth and there is the 10% penalty. Good catch.

[@mhatcher1971]

So we are kind of behind on the Roth IRAs and are 401ks are not that large with maybe 100,000 in them. We are currently making significantly more money about 60k than we had in the past few years 150k gross. I am 53 & wife 60 So what I'm thinking about doing this we both max out our 401ks and also do the Roth for 8k each. So my thought is to start chunking maybe 45k into Roths. Pay the tax now as I would if I didn't max the 401k. So each year what we put into the 401k will also go into a Roth. Plus adding to our Roth's

[@ds94703]

Can you just move money from an existing traditional IRA to a ROTH IRA and pay the taxes (once)???

[@tomcat4321]

Can the tax on rolled over money from Traditional IRA to Roth IRA be written off against the losses in stock market in my brokerage account?

[@PH-dm8ew]

so for someone with 1.3 million in deferred IRA and no or limited cash or brokereage funds retired at 62, does it pay to do roth conversions and pay the taxes out of the converted funds?

[@michaellatta]

If you are not making more in retirement you are screwed by inflation.

[@rulabula2259]

I recently moved $10K from my previous employer’s 401k account into a rollover IRA. I made no contributions neither I have invested. Would it make sense to open and move this amount to a Roth IRA? Should that be done by the end of the year?

[@melissaschmit4394]

When converting a traditional IRA do you have the same max yearly limits that can be put into the Roth IRA or if it’s over $7500 can i convert the entire amount?

[@MomIDidMakeit]

I "inherited" a Roth IRA, Traditional IRA and TOD account through a divorce settlement. Am I allowed to transfer the Tradtional IRA to the Roth IRA? You mentioned Inherited accounts from Grandma. Does this fit into that scenario? I'd like to begin moving money into the Roth asap.

[@keithmachado-pp6fv]

The Roth does not work every time. It only works if you are in a lower tax rate when you pay the tax PERIOD. There is no argument. Rate of return is irrelevant. You can self direct any account. The rate of return does not matter. If you pay the tax up front aka Roth, you have less to invest so whether zero or 10% per year you end up with the same after tax if you are in the same tax rate when you pay the tax. Only reason for a Roth is if your tax rate will be higher in retirement and don’t forget if you retire at 63 (I did) there are 12 years before RMDs kick in. So that means at least 12 years before I am even close to my working life tax rate. Oh year 1 at 75 RMD is 4%. So for $5m balance that is $200k. If married that is the 22% tax bracket. Add SS and that is 24% bracket. And I will be living in Florida by then with no state tax. When I got my deductions and deferrals I was in the 35% federal plus 5% state. Let me check. 24% vs 40%. Hmmmm.

[@PH-dm8ew]

pretty sure if you do a roth conversion you owe the taxes spread out quarterly over the current tax year. if you wait til April 15th you will pay a penalty.

[@spcurrie]

I used to think that it was smart to convert to a Roth because I would be paying taxes on the "seed" in the beginning, which is a smaller amount rather than on the "harvest" at the end, which is a larger amount... having been invested for a while. However, the math does not support that. You'll pay the same amount in taxes either way. It just depends on whether the tax rate will be higher or lower at the time you pay them. Most people believe the taxes are going to go up, and that seems to be the more significant reason why to pay the taxes now rather than in the future.

[@MatSorensen]

Thanks Sean for sharing your thoughts on this. Each person's situation is different. That's why I always suggest consulting with a CPA re: timing of doing a Roth Conversion.

[@yossarianmnichols9641]

When you start RMDs do you have to spend that money at Vegas or can you invest it so inflation does not eat it away. If you re-invest it you will pay taxes on the capital gains. You won't in a Roth. Yes the tax rate is close to the same for each strategy at point 1, the distribution or conversion. It is the next decision that creates different tax payments.

[@jgleigh]

Arizona tax brackets for 2022 are 2.55% and 2.98% (the top rate of 4.5% no longer exists). In 2023, there is a flat-tax of 2.5% on everyone.

[@donlandis1100]

We have our Roth IRA's and these were completely funded with periodic Roth conversions from Traditional IRA's. I pay the taxes on the estimated conversion each quarter so that our annual tax rate is maintained at below the 24% IRMA trigger ceiling. We are 75. My question is about the 5 year rule. Do I start the amount allowed to withdraw w/o taxes timed from each conversion date plus 5 years or do I have to wait until I am done based on the last conversion? That is, no withdraws for 5 year period from the last conversion. I manage my portfolio in stock trades daily and have had most excellent growth since I retired at age 59.

[@ds94703]

Good question. I have the same problem. I'm a newbie here, but want to do the exact same thing: periodic conversions up to the bottom of the next higher bracket. I've been contributing the maximum every year ($7500/yr now, over 52). Some years are better than others and only one time did I hit the limit. If I knew about the Roth Conversion, I would have done that during my last period of semi-retirement when my income dropped. Now it looks like the RMD nightmare is about to happen, so I want to convert up to the 24% bracket every year. Trouble is I dont know what my MAGI income is going to be until December, and you need to do the conversion in the same year. (not so with straight contribution of post tax money, you can contribute up to April 15th of the next year). The estimated taxes are part of the deal, but you can double up on the withholding (up to say 28%) when you do the conversion and not have to worry about AMT, right?

[@Hilke88]

If I have a Roth IRA currently and a Traditional IRA too. If I convert my Trad IRA to Roth does it go into my already existing Roth IRA account or does it create a second Roth IRA and then every time you convert you get a new IRA and have like 10 Roth IRA's?

[@SOM-inc.]

👏 👏 👏 yes yes yes

[@MatSorensen]

Thanks!

[@markherron6139]

You mentioned opening a Roth IRA for your parents, funding it, and putting yourself as the beneficiary. Assuming your parents are retired and don’t have earned income, how would this work?

[@MatSorensen]

Your parents could roll over an old 401k or IRA. However, I don't know the details of your situation. You are welcome to speak with one of our account specialists to confirm what is possible for your parents: directedira.com/appointment/

[@lmbarnes3]

Married filing seperate affect on roth conversion

[@sung-sooksmith7705]

what if i don't have cash on hand?

[@randallcotner1258]

Tell us how you really feel Mark? hahaha

[@MatSorensen]

🤣