Watch THIS Before Roth Converting In 2024...

A Roth Conversion can be a powerful strategy for many retirees, however it's crucial to understand how it works and if a Roth conversion is right for you. When you perform a Roth Conversion, you are deciding to pay taxes today to get out of future taxes. However, there are many things to consider before converting immediately.
In this video, we'll answer:
What is a Roth Conversion?
Is a Roth Conversion a good idea?
The impact a Roth Conversion has on, social security, taxes, RMDs, etc.
Resources:
Access to the tool we used in this video: app.rightcapit...
Learn About Our Firm: DefiningWealth...
Work With Us: calendly.com/d...
The Defining Wealth Podcast:
Our goal for this podcast is to help give you the clarity to make confident financial decisions. Personal finance is... personal. Everyone's goals, objectives, and values should be reflected in their financial plan. Our mission is that you can learn to apply what we cover to create a better and more fulfilling life.
Hosted by Kyle Kuyat, CFP®, ChFC®, RICP® & Jacob Gardner, CFP®.
Disclosure:
The following video is for education and entertainment only, and is not to be considered financial or tax advice. Past performance is not indicative of future results.

[@KyleKuyat]

Thank you for watching, let us know if you have any questions!

[@beilu9529]

Do they need to withdrew more money from 401K in order to pay taxes for Roth conversion? The fund in their taxable account seems not enough for them to spend in the years before taking SSN, not to mention to pay for the extra taxes for Roth conversion.

[@KyleKuyat]

Good question! In this scenario they do run out of the taxable funds by living on them first plus paying the taxes on the Roth conversions. Most of the time it’s ideal to pay taxes out of a taxable or cash account but for this client the reduction of future forced distributions via RMDs was worth paying the taxes on the conversion through tax withholding.

[@beilu9529]

Understand. Thank you for your explanation!

[@KyleKuyat]

Of course, thank you for your question!

[@gingerkilkus]

I just switched up my Roth IRA to 50% SCHD, 25% SCHX, 25% SCHG, and my Roth 401k is 70% vanguard S&P 500 index, 20% vanguard growth index, and 10% vanguard international index. Seeking best possible ways to grow $350k into $1m+ before retirement in 3 years.

[@fadhshf]

consider financial advisory so you don’t keep switching it up... those sound like great picks anyways, not bad for $350k.

[@hasede-lg9hj]

Agreed, I'm in line with having an advisor oversee my day-to-day investing cos, my job doesn't permit me the time to analyze stocks myself. Thankfully, my portfolio has 5X in barely 4 years, summing up nearly $1m as of today.

[@lowcostfresh2266]

this is huge! would you mind revealing info of your advisor here please? in dire need of portfolio rebalancing

[@hasede-lg9hj]

I take guidance from an advisor Annette Marie Holt To be honest, I almost didn't buy the idea of letting someone handle growing my finance, but so glad I did.

[@leojack9090]

Thanks for putting this out, curiously inputted Annette on the web, spotted her consulting page and was able to schedule a call session, she actually shows a great deal of expertise.

[@gabec1087]

Very informative and interesting. Thanks for the info gents 👍🏼

[@KyleKuyat]

Of course! Thanks for the comment Gabe, much appreciated!

[@busywith6]

Great job on the video-very informative!

[@KyleKuyat]

Thank you very much!

[@Robert-wb9tx]

I would have like to see the scenario of filling to the 12% bracket. By jumping to filling up the 22% bracket this couple is paying zero % by age 83. Wouldn’t it have been better to not be exhausting the full 22% bracket for the first 23 years of retirement and save some of those distributions for later years to be taxed at 10% or 12%?

[@KyleKuyat]

Hey Robert, thanks for the question! Due to the large amount of RMDs they would have incurred, getting all/most of the funds into Roth before that required beginning date actually increased the after-tax value of the portfolio more than if we stretched it out. You also can’t “convert” RMDs so you would have to distribute even more to do the conversion after that required beginning date.

[@Robert-wb9tx]

Still, I’d prefer to pay 10 or 15 percent in years 83 and beyond rather than 22% in earlier years. I don’t think you necessarily have to totally get rid of all rmd’s

[@kersting13]

@@Robert-wb9tx Agreed, Robert. A lot of times, these conversion scenarios want you to convert up to the top of the 22% bracket for several years. I wonder if it might be beneficial to take advantage of the lower marginal rates in the future by not ENTIRELY filling up the brackets in EVERY year before age 75. Perhaps after the tax deferred accounts are reduced to a level where they are not GROWING in excess of any withdrawals, the conversions could be scaled back a little in order to take advantage of the 10/15% rates in the future vs paying 22-24% rates paid to convert.

[@MichaelSmith-if2rs]

Good information. However, when you are explaining the difference between the current tax rates which are scheduled to sunset at the end of 2025 and the higher rates which are set to resume at the beginning of 2026, you glossed over a VERY important point. It's not just the rates are going to "rise a few points", that's actually a fairly minor point; it's that the income brackets for determining your marginal rate will shift dramatically! For example, if your married with combined income 90k your current marginal rate is 12% compared to 25% under the old rates, if your income were 200k your current marginal rate is 22% compared to 28% under the old rates and if your income were 250k your current rate is 24% compared to 33% under the old rate. Increasing your tax rate by over 100% is not a few points, it is significant, and people should be aware. This is why people need to work with a certified financial planner to make these and other financial decisions.

[@brianmccorry9186]

Excellent point! Kyle, what do you say about this concern?

[@Jake_Gardner]

Very good points Michael and perhaps we didn't stress this enough! But this is why lots of our clients are asking for analysis on what to do THIS YEAR about Roth conversions instead of next year, year after, etc. This is also exactly what we mean when we talk about an expectation of tax rates going up. US taxes are very low now compared to the past and around the world.

[@1ael346]

Not just the brackets will be less and the tax percentages will rise, but your standard deduction will be less.

[@kersting13]

@@1ael346 Standard deduction will be less, but the limit on SALT will disappear. There are some trade offs.

[@ralphparker]

I'd like to see how this changes if they both waited to 70 to start SS. This would give a bit more time to do Roth conversions and Less SS hurdle to deal with.

[@nikij.6058]

How much were you converting? Hello!

[@ericchen1205]

Great video. Question and comment - I have seen this type of financial simulation and calculation showing how much "total cash tax paid in lifetime" between not doing Roth conversion vs spreading Roth conversion on low income years and fill the low tax brackets.... but shouldn't we consider the Net Present Value? Meaning the total cash taxes paid taking into account a dollar dollar paid in conversion tax today is worth more than a dollar paid in future for tax on RMD of pre-tax account? If we consider that, then the benefits of paying Roth conversion tax now over paying income tax on RMD need to be discounted, right? Let me know if I miss the point. Thanks,

[@KyleKuyat]

Thank you Eric, great question! The present value is certainly a consideration and that is why some will argue that if you have less than 10-15 years the conversion wouldn't make sense. However, what we are most concerned about is "after-tax value" and if you will ultimately be able to pull out more money from the retirement account on an "after-tax" basis (including the taxes paid to do the conversion!) then we view it as a net positive. Regarding RMDs, the point for this client was the RMDs would far outpace what they needed to actually spend - which included adjusting for inflation - and so it made sense to limit that and get more funds into the tax-free Roth vehicle. I appreciate your question!

[@jeangreen432]

I'm converting in 2024 & 2025 to avoid the tax bomb of the sunset of the TCJA

[@Mitzi73]

Remember medical expenses in old age are tax deductible with traditional IRA and not with Roth funds. It helps to keep some tax deferred dollars.

[@KyleKuyat]

Hi Mitzi! Feel free to clarify, but I believe you are referencing the itemized deductions over 7.5% of AGI (adjusted gross income) for medical expenses. That is true and a good point! The distributions are not fully counter-acted by that deduction but it is a good tax move to keep those receipts and use the deduction. FYI - those medical expenses CAN be paid for tax-free by using an HSA if you plan ahead. You can see more about that in our previous podcast on HSA's.

[@Mitzi73]

@@KyleKuyat Yes, what you said is all correct.

[@ralphparker]

@@KyleKuyat AGI includes RMD doesn't it.

[@jb9201]

What to do if u don’t have money outside your tax deferred account to pay taxes on roth conversion? Therefore lowering your investment Thank you

[@KyleKuyat]

Thanks for the question JB! Obviously having cash available to make the payment for the tax is preferable so the tax deferral can continue, but in a lot of cases "if" you expect a higher tax bracket at some point in retirement it can still make sense to do the conversion. We tell clients if the math is close that at least the Roth allows you to 'control your own destiny' and pay taxes at a rate you know is certain. Hope that helps answer your question!

[@1ael346]

I would love to covert my IRA to a roth before collecting my social security. I'm 60, have a fulltime job with health benefits, and one of the reasons I don't want to convert before reaching 65 is if I need health benefits from Obama care. Obama care is based on your income and how many people in your household to be subsidized. If your unemployed with no income coming in you can covert your IRA to a Roth and it's considered income. Other than that I would love to convert everything before 2026. We are 30 plus Trillion in deficit. Of course taxes are going to rise. I may just convert everything now, and hope and pray I have a job with benefits till 65. Sooner or later you or who ever you leave your money too will pay these taxes. If you die with all IRA money you might as well leave it to the church, they don't pay any taxes.

[@go2gym]

You can convert too much and hurt yourself long-term. There is a level of conversions that work best, but it's specific to your situation.

[@keithmachado-pp6fv]

I am not a Roth conversion fan. Tax deferred account RMDs are not going to be an issue if you can limit your income to RMDs and SS. If you are 60 years old you have 15 years before RMDs which is plenty of time to spend some of your taxable account cash as well as withdraw some from IRAs to live on. You can move any taxable income generating assets to stocks or municipal bonds or cash value life insurance to prepare for RMDs. Since both the standard deduction and low tax brackets will adjust annually for inflation, you can pay less than 10% tax on the year 1 RMD from a $2m IRA, which will be less than $80k. Therefore converting in the 22% or 24% brackets which are often recommended will not be optimal.

[@keithmachado-pp6fv]

To clarify, the RMD is $80k. Tax will be under 10% of that.

[@thomasmoshier3920]

But you’re not including tax on SS, pension, or other sources of income. Nor are you including your spouse’s retirement income. All of it is factored into your effective tax rate as married filing jointly. Which will be far more than 12%. You can delay SS until 70 and live off your pre tax IRA rather than convert to Roth. But usually for a couple, it’s better for one spouse to take SS at FRA. And the higher earner to take it at 70.

[@keithmachado-pp6fv]

Please reread my post where I said “if you can limit your income to RMDs and SS”. In my example the year 1 RMD on $2m is less than $80k. If you get $60k SS (combined with spouse) you now have $110k income. My example said you are 60 today so 15 years of increased standard deduction wipes out all or most of the tax on your SS income and you RMD’s will be taxed at 10% and 12%, much lower than the 22% to convert. Yes RMDs go up each year but the brackets expand as well.

[@thomasmoshier3920]

I did Keith. And on that specific example it works. But it doesn’t work every time. For example, I have a 403B with a balance of 2 million as in your example. However my SS at FRA is 3800 a month and a pension of 3250 a month. My wife has a 700K in her 403B. SS at 3400 a month and a monthly pension of 2500. We’re both 65. There’s absolutely no way we’re in the 12% tax bracket. Our last year working we were in the 20% effective tax rate. And in retirement it will continue to be about the same…

[@keithmachado-pp6fv]

Everyone’s situation is different. Yours seems very unique and fortunate I may add. Congratulations on locking in that much guaranteed income. It is something to celebrate not fret over paying a bit more tax.

[@prodigy7893]

I'm 35 and I invest in ROTH 401k twice a month. My contribution is considered post tax while my employer contribution is considered pre-tax. what would happen if I convert the employer contribution into Roth, and pay tax on it monthly/yearly through out my career so when I reach the retirement age say at 60, all of my portfolio will already be in post tax Roth? will that be better or worse for the total amount in my portfolio?

[@prodigy7893]

I max out my Roth 401k, both mine and my wife's Roth IRA and my family HSA accounts every year,

[@KyleKuyat]

Hey Rushan! Yes you can do that if in-service conversions or withdrawals are allowed. Some plans let you do it within the plan and others don’t, but it would allow you to distribute the pre-tax dollars while you are working to do the conversion (it depends on the employer). Keep in mind that if you are in peak earning years you really need to calculate your tax burden over time and think about which marginal tax bracket you’ll be in now and in the future.

[@kersting13]

It's important to understand that you'd be paying your top current marginal tax rates today in order to pay 0% taxes in the future. That's NOT a good plan. Typically, the MAIN decision between Roth and deferred is whether your current marginal tax rate will be higher or lower in the future. IF you will have a lot of income from other sources in retirement (say a pension or rental income), then being 100% in Roth might be a good idea. If you're going to be in the situation described in this example, then being 100% in Roth is likely a poor plan.

[@AidenLiamf7q]

I think investors should always put their cash to work, especially In 2024, we'll start to see more market diversification. I'm hoping to invest about $350k of my savings in stocks against next year. Hope to make millions in 2024

[@NatalieHannahq3g]

Since risk is at an all-time high right now, perhaps you should be a little more patient and return when it has decreased. Alternatively, you can consult a trained financial expert for strategy.

[@IsabellaAriau2m]

Yes true, I have been in touch with a brokerage Advisor. With an initial starting reserve of $80k, my advisor chooses the entry and exit commands for my portfolio, which has grown to approximately $550k.

[@SophiaChloé6f]

I’ve been looking to switch to an advisor for a while now. Any help pointing me to who your advisor is?

[@IsabellaAriau2m]

NICOLE ANASTASIA PLUMLEE' is the licensed fiduciary I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.

[@SophiaChloé6f]

I searched for her full name online, found her page, and sent an email to schedule a meeting. Hopefully, she responds soon. Thank you

[@Harlyn-g7c]

❤

[@leeklammer]

What software are you using in this video? I'm looking for better tools for my own personal use for family financial planning.

[@KyleKuyat]

Hey Lee, I have a link for it in the description, it’s called RightCapital. I don’t believe they allow purchase of it however unless you’re a financial advisor but I could be wrong. There are a few others out there that may allow for a direct to consumer setup, but in my opinion they don’t offer as much.

[@keithmachado-pp6fv]

Unless you have over $5m in an IRA, RMDs will not be the cause of IRMAA surcharges. IRMAA limits adjust annually for inflation. If you are 60 years old today the IRMAA limit when RMDs kick in using a 3% per year adjustment will be over $300k.