WARNING: Roth Conversions CAN Hurt Your Retirement Plan (Explained)

[@tomgradel4999]

Roth conversion strategies for couples should also include the widows tax trap which, based on life expectancy tables, means that the surviving spouse (usually the woman) will have about 5 years of taxation at the single tax rate. It looks like the sample scenario only includes two years and during those two years the surviving spouse is at the 33% rate. I'd be curious to see this example worked with 5 and 10 years remaining for the surviving spouse.

[@401Blues]

Taxes are not the only criteria to consider. It's nice to have a source of tax free income for a really major unexpected expense and from an estate planning perspective it's a tax free account inherited by your heirs.

[@rapfreak7797]

Thank you for these great deep dives on nuances of Roth conversion. I just performed some conversions this week but I’m more than 20 years from retirement so I’m not concerned about flat returns over that time period.

[@captsorghum]

Don't forget to include IRMAA and state tax rates in your Roth strategy. IRMAA seems equivalent to an additional 5% tax bracket.

[@drott150]

Yup. Also, you can bet it's only a matter of time before they classify Roth withdrawals as a part of the IMRAA income penalty threshold. Because technically it's not a tax on those withdrawals, only a Medicare "surcharge."

[@Bondbeer]

What are you suggesting for IRMAA and State Tax? A reason to convert or not convert? Or are you just saying to incorporate it?

[@captsorghum]

@@Bondbeer Incorporate it. When converting, you generally want to stay fairly close to, but safely below, the next-higher IRMAA threshold. If you do, then you can figure any IRMAA liability is equivalent to about 5% on top of your marginal rate (if above the first threshold, that is). For example, I'm converting through most of the 24% federal bracket, but because I know I'll be subject to IRMAA I'm counting it as 29% federal. And then with state income tax, it's really 38%. But it's still worthwhile for me to convert at that rate because I expect that my effective marginal tax rate after starting Social Security will be even higher than 38%.

[@jimclark5037]

Wow very interesting! Everyone is talking about Roth Conversions but first time I've heard this discussion of risk of lower returns negating the tax savings.

[@keithp5568]

@Jim Clark if you’re married filing jointly and if unfortunately you or your spouse passes, your filing single tax levels make it more challenging to convert in the future. They have done videos on this impact as the “widow’s tax”. Lots of variables here to account for and a “one size fits all” approach won’t work well. I still appreciate their ability to explain the details for us to help make our best own decisions.

[@willyweid4442]

If you expect to leave an inheritance isn't it better to have the money in a Roth?

[@kckuc310]

Definitely

[@wdm213]

Stock is fine as well because the cost basis is bumped up and there is no tax consequence

[@kzalaska4804]

But what about the fact that the account is growing? If the money doubles in seven years then I am paying half the taxes if I do it up front with a Roth conversion at the same tax rate. I suppose you would take inflation into account, but you are still saving on the spread between investment gains and inflation, or am I missing something?

[@hornbaker]

This analysis seems to model only Roth vs tax-deferred… but someone who saves aggressively in their retirement account will surely also have regular taxable investments. Those will have returns that push them into the higher tax brackets, and Roth conversions become much more necessary.

[@dmsalomon]

Exactly, also I think he assumes that the Roth conversion will be payed out from money inside the ira!?! But any sane person would be using other money keeping their ira balance the same! Even better they would be doing these conversions every year (backdoor IRA).

[@hornbaker]

@@dmsalomon Agreed to paying the taxes out of taxable accounts instead of deducting from the conversion amount. That’s a widely accepted best-practice, so I doubt he’s modeled otherwise. And I agree with doing small annual conversions now, which would usually not push you into a higher bracket (and makes your gains tax-free sooner so you don’t need to convert them later). I’m not saying he’s wrong - converting so much that your pre-tax distributions are in a very low tax bracket would be bad. But since you’re limited in how much you can put into a retirement account annually, aggressive savers are going to also have taxable investment accounts that will benefit from the retirement accounts having been converted to Roth.

[@jpturner171]

Thanks for covering this. I’ve always felt that it was not a good move for me at this point in my life.

[@supersteve8305]

Sure is a lot of variables. I'm thinking I will control what I can. I plan on converting up to the 24 percent bracket, and then the 25 percent bracket until I'm done to zero in pretax or I turn 72. This will be my first year converting as I retired in 2021. I'm 57 now so have plenty of years to convert, God willing.

[@larryjones9773]

Why convert down to zero in your pretax account? Converting at a higher tax rate than the assumed tax rate that is avoided on Roth withdrawals is usually not advisable.

[@craigfugit997]

It is not advisable to draw down your tax-deferred balance to zero, because you would be forfeiting (wasting) your Standard Deduction amount each year. Optimally your RMD each year should be equal to that year’s Standard Deduction amount making your RMD tax free as it would be offset by the Standard Deduction amount. Suggest reading David McKnight’s “Power of Zero” for more on that tax planning strategy.

[@larryjones9773]

@@craigfugit997 Or, even make your RMD equal to that year's standard deduction and 10% bracket. Most people would not want to miss out on the 10% bracket.

[@Gregarious3]

Past the 24% tax bracket in rental income. A good problem?

[@larryjones9773]

@@Gregarious3 Not if you have a way to avoid it. Otherwise, we thank you for funding our government.

[@lidarman2]

@5:11 Not sure why you have a graph that goes to 110+ years of life expectancy. This seems deceptive to me.

[@davidfolts5893]

How much tax diversification do you already have? Are you invested in bond index funds in your IRA? Prepare for a longer breakeven. Thanks for the great information on Roth conversions, Eric. Your info is always top-notch!

[@wallace_n_gromit3180]

looking at the graph at around 1:08 minutes into video. there seems to be a severe drop in the 32%-33% yellow line that is not like the 24%-28% purple or the 22%-25% green line. why is that? seems a bit out of scale.

[@MichaelToub]

Great Video!

[@daveschmarder-US1950]

This is great info. I'm 72 and it is too late to do much of this, but a few years ago I got my asset location aligned with my future taxes. I would make one suggestion on the videos. The edits are very tight, resulting in unnatural sounding sentence transitions. How about tacking on about a 0.1 second delay before cutting off the end of each statement.

[@davidleong6606]

Have you tried adjusting your preferred “playback speed” found in the upper right icon?. ;)

[@drott150]

Sorry, but for millennials and all younger gens, think that talking very fast, jerking rapidly from one scene to the next and continuously changing the frame is "good" because it does a better job of keeping the ADHD attention spans focused and not clicking away.

[@jpturner171]

This may seem like a dumb question, but can’t I take my RMD and place it in an IRA, then deduct that amount when calculating my taxes owed?

[@danyarbrough828]

Nope. Unfortunately, you can’t.

[@adamloughran]

Your videos are excellent but I have a question. As I understand it, you're basically saying that Roth conversions early can hurt if returns aren't great later in retirement? If that if that's the case, wouldn't the opposite be true? In other words, with the market is down so significantly now, wouldn't it be an ideal time to do conversions now? Another way to put it is...wouldn't Roth conversions make a lot of sense if returns were not great in your early retirement years?

[@5metoo]

Yes. So it depends on your outlook, timeframe (when you expect to need it), and I'd say what you'll be investing in. I wouldn't think it'd be a good idea to Roth convert and put the money into fixed income. If your strategy is such that time is in your favor, then I'd think it would favor some conversions.

[@5metoo]

@@_-Karl-_ It would seem to me fairly crazy to have fixed income stuff in a Roth to begin with, though I guess there may be some uses, but I was just stating the obvious for completion.

[@karenf14]

Perhaps this has already been addressed, it seems the videos I've watched are directed towards people who have a high retirement balance. Are there any advantages / disadvantages for those in the median range to do Roth conversions. ?

[@charmcrypto824]

Watching this breakdown on Roth conversions is eye-opening! Got me thinking about my own retirement strategy. But hey, ever considered adding a little crypto spice to the mix? My Digital Money's got this cool platform that makes it super simple. Just saying, it could be a game-changer

[@88888gerald]

hope this helps someone...

[@srt8turboawdjeep146]

Does the plan need to account for variations or does the money manager, ya know the professional selling their services, need to be able to adjust and optimize the plan as the market and tax laws change??? That is what I expect from a professional, not just being able to run monte carlo models with varying inputs ... have not had one money manager successful at answering this question yet. Would luv to hear what you company believes it can do.

[@rawhideslide]

We need to consider not only bad scenarios (horrible sequences or lost decades), but great ones as well. Humans (and financial planners) tend to focus too much on failure and not enough on success. If we return to 10+% ROI, RMDs can be astronomical , and a little Roth can go a long way to fixing it. It is a matter of balancing risks. Hmm,.. I bet there is a chart for that :)

[@gcburkett]

In the very successful cases you will pay more in taxes if you convert less than optimal but you will still have a lot of money. Now if you have so much that your success is near 100% of not running out of money then you might be willing to pay more overall in taxes by converting aggressively to leave Roth assets to heirs.

[@sharmon40]

I'd love to see you address QCD impacts if one is charity minded. No one wants to address this it seems.

[@ralphparker]

Take away: I don't believe the Monte-Carlo simulation produces results in a +/- 3% error while I do agree a 97% result is better than a 94% in overall planning for long term retirement, the difference is basically noise. You kind of mentioned this, but with Roth conversions is an optimization effort. Let's say putting your best foot forward. So while we make a Roth conversion to help us out overall there may be 30 cases out of 1000 where it didn't help and actually hurt. There is a chance that those 30 cases will never actually exist because of the way Monte-Carlo's work. But there is no measure of the upscale benefit because it was not a metric you brought forward in your conversation like more overall spending money, more money left to heirs, etc. Finally, do not optimize on total tax savings. This is a misleading metric and you pointed out why, if the conversion tax rate is equal to the withdrawal tax rate there is no net gain in the conversion, but you will save taxes. You should focus on net post taxed spendable money.

[@wdeemarwdeemar8739]

I agree with your premise but the MC doesn’t calculate if one of people in this couple dies or heck even divorces the taxes would spike up significantly so better to Roth when and where you can.

[@wdeemarwdeemar8739]

@@_-Karl-_ if one dies earlier than projection now the remaining spouse has to file every year as a single filer. So the standard deduction would be much lower every year going forward. This would just make that earlier than the plan

[@gregsteve2634]

I'd like to see how a non-working spouse that is over 10 years younger affects RMD and Roth conversions.

[@57054]

If you have less than 700K in a traditional IRA at 65, you would deplete it all only taking around 60k per year out. This would keep you in a 12% bracket after std deduction. I wouldn't think you'd have any left after 25 years thus not needing to convert to Roth.

[@captsorghum]

Only if you don't have any Social Security or taxable investment income.

[@richardbryan9434]

When a market is bottoming, the best stocks make their lows ahead of the absolute low in the market averages. As the broader market averages make lower lows during the last leg down, the leaders diverge and maker higher lows."

[@robertalexandro2162]

If history has taught us anything, it’s that bad market environments are the best times to find great opportunities.

[@lucaseverett99]

@@robertalexandro2162 I feel like nobody ever mentions the most important aspect of generational wealth building. You have to be able to protect your investment. Don’t buy it if you may, at some point, be forced to sell it. You HAVE to be able to exit on your terms.

[@richardbryan9434]

@@robertalexandro2162 Starting out with a with a professional that knows the ropes of the choppy but profitable market is the best way to achieve getting a well structured portfolio. That’s why I have been working with ‘DOROTHY DONNA TAGLIENTE ’ and that doesn’t make me daft because in financial dealings one have to be prudent. Most traders enter exit with a quick 10% profit which is not bad in a general opinion but why not aim higher, it doesn’t necessarily mean to be greedy.

[@lucaseverett99]

@@richardbryan9434 i am approaching retirement & i think this is the last window of opportunity for me to become a millionaire before retiring, as Recessions and downtrands are where millionaires are created. Currently i have some lump sum in a savings account and will like to work with a fiduciary financial advisor to achieve my goals. Please how can i reach DOROTHY

[@richardbryan9434]

@@lucaseverett99 you can look her up as she has an official webpage for consultations. According to Warren Buffet "I don’t think most people are in a position to pick single stocks. A few are, maybe, but on balance, I think people are much better off buying a cross-section of America and just forgetting about it" In Other words, you need expert hands to be able to outperform the index.

[@thedopplereffect00]

I think it's dumb to assume future tax brackets and legislation.

[@SafeguardWealthManagement]

So do you flip a coin for making future tax decisions then?

[@thedopplereffect00]

@@SafeguardWealthManagement no, but to think congress is going to raise taxes on the clock is a bad assumption, I don't believe there is precedence for that. I try to minimize taxes for today.

[@SafeguardWealthManagement]

@@thedopplereffect00 so you think we should plan based on the rates and tax laws we know today? We agree. Tax Cuts and Jobs Act is set to sunset in 2026 with no changes or intervention. This is the only 'tax hike' assumed. If you're betting that TCJA is extended, then you're betting on congress's intervention. Now, although I don't think that should be your base assumption, your tax plan could be built assuming these rates are here today. In many retiree situations, Roth conversions still make sense, but the plan will look different. But only trying to minimize taxes today often leads to big tax issues down the road. In any area of life, we rarely try to only optimize for the short term. Why would taxes be any different? Disclaimer: Depending on your situation, minimizing taxes today may be the right move. If you're in a high tax bracket from working and will have better opportunities in retirement to minimize future tax burdens, then great. But always minimizing taxes today is not the best long-run strategy.

[@drott150]

Stacked firewood, flannel shirts...what's with the lumberjack theme for a desk geek?

[@johnblack2193]

Question that you maybe able to answer for me. I am 63 now, and retired 7 years ago. Just started last year converting some of my 401K into a roth. My issue is that I was required to take SSDI to get my pension. This means I am on medicare part A and B. My AGI is approximately 65000 and I would like to convert as much of my 401K to a roth, as I ccan afford. Since I am on SSDI will the ERMA apply to me? If you don't know the answer would you know where I can possibly find the answer. Thanks.

[@supersteve8305]

Hi John. I would think that could be answered by the social security office or found on the sociol security website. Good luck sir.

[@larryjones9773]

I'm on SSDI, and I can assure you that IRMAA applies to us. That's how I learned about IRMAA (by performing a Roth conversion to the top of the 22% tax bracket). Social Security should really send out their annual IRMAA letter to everyone on Medicare, not just to those who surpassed the income limit for the prior year. I'm 61 and been on SSDI since age 50.

[@i-postm4943]

Yes, IRMAA applies to you. You'll get a letter from SS stating your higher Medicare amount(s). If you get a job and take the employer's insurance, there would be no IRMAA upcharge unless you keep Medicare.

[@i-postm4943]

@@larryjones9773 By By chance, do you invest in an ABLE account? If so, do you think it's worth it with its high fees compared to VG? I'm not sure if I should continue to invest in ABLE or, instead put that $ into a VG taxable account.

[@larryjones9773]

@@i-postm4943 I don't have an ABLE account, as they are for those who became disabled before age 26.

[@businessaccount1752]

RCs optimize money when you don’t need it and add risk to your worst case scenarios.

[@f430ferrari5]

The one oversight that is continually made is the oversight related to the “income level” between brackets after Trump’s tax cuts end. Okay. So we know the 12% “rate” may be gone and we now go back to the 15%. What is being assumed is that the income level for the 15% is still topped off at 75,300 for MFJ like it was in 2016. This is nonsense because of inflation. In 2000, the 15% topped off at 43,850. In 2010. 15% topped off at 68,000. So by 2026-2030 the 15% is probably over 100k MFJ. It’s crazy to perform Roth conversions while still working. Might as well retire then do the conversions. If one is still working and you’re in the 22% bracket then stop deferring and put into Roth 401k. Many companies are now offering. If below income limits put in Roth IRA.

[@larryjones9773]

Performing Roth conversions when work income drops to $0, is certainly optimal. That's what I did, as my pension was $0. It's ALL about the tax rates we pay on our conversions & the estimated tax rate we avoid on our future Roth withdrawals.

[@f430ferrari5]

@@_-Karl-_ while the graph shows that I’ve had this discussion with Eric before. He “verbally” portrays a scenario which isn’t realistic and could cause people to convert at 22% or 24% or higher only to not realize the 15% bracket is still there and can be quite high income wise!! The better option is to retire sooner. If one has a pension then unfortunately it’s harder to perform conversions at a low tax rate. Why be greedy though just to give the government more money? Everything is relative. Each persons/couples should strive for one tax bracket lower in retirement for Roth conversions and find a window for it. Or for one year stay in same bracket for just one year. So you would convey 175k or do brackets up to 24% then drop back into the 15% bracket in subsequent years. Why stay at 22% for several years? It’s hard to know what will happen to the standard deduction. Most likely it’s going up also each year. Only risk is one spouse dies.

[@kathyw4811]

You suggest Roth 401(k) contributions in place of Traditional 401(k), in certain circumstances. Be aware that, unlike Roth IRAs, Roth 401(k) have RMDs. :(

[@f430ferrari5]

@@kathyw4811 I only suggest Roth 401k because there are no income limitations and the amount you can contribute each year is larger. I did say if one is under the income threshold then start Roth IRA. Remember you can alway rollover the Roth 401k into a Roth IRA. Just have to wait 5 years for the earnings growth. Best to have both or all. I have Roth 401k and Roth IRA. I also have IRA and 401k. My 401k is by far the largest. When I stop working I will perform Roth conversion from regular 401k to Roth IRA for 3-5 years. I don’t plan on using any of the Roth until 80. I plan to move the Roth 401k to Roth IRA at around 65.

[@polymath5119]

@@kathyw4811 Additionally, the Secure Act 2.0 as part of the spending bill just passed eliminates Roth 401k RMDs starting in 2024.

[@ParabolicGains]

1

[@mwh753]

I'm sure you want more viewers and subscribers. But your topics and delivery are inherently geared to the fortunate/rich few, not to the majority just getting by😢

[@excatholicatheist]

Tax Cut and Jobs Act. Trump and the Repubs pulled a fast one on John Q Public