What's the Right Roth Conversion Amount to Avoid a Tax Nightmare in the Future?

[@jimv77]

Sammy, if you are reading this: Mad respect that you retired at age 47!!! I am 46 but "Married with Children". I could retire financially...but mentality going through the what-ifs......again, respect!

[@snouriani]

Thanks so much! I have ZERO regrets in retiring early. Still keeping busy investing and financial planning. Just do it if you can!

[@PorscheSpeedster-kz6nc]

A thorough review James with the finite information. 10% growth seems a little aggressive but within reason. Based on the probability of rates increasing and the information provided, I would suggest making the conversions in ‘24 & ‘25 to take full advantage of the 24% tax bracket as a sweet spot and then continue the $50k per year there after or maybe 25% upon sunset. Given the young age, the tax free growth to $6 million is much better than $6 million taxed at what will probably be higher rates. A great problem to have. If concerned about heirs, this would be all the reason more to convert as much as possible. This would be a great case study to show the income tax planning through age 90 with the baseline with RMD’s and then with the proposed conversions assuming sunset of the tax cut in 2026. Thanks again for your channel.

[@headlibrarian1996]

Assuming 10% growth $50k a year isn’t enough to reduce her taxable balance. She needs to convert more than the account increases, and then some.

[@jeeplife5262]

Very detailed analysis! Bottom line for me would be, at minimum, convert IRA money to Roth up to the top of the 22% bracket. It’s hard to imagine anyone with her level of investments ever getting taxed less than 22%…

[@ScottKnupp]

Nice job. I'm sitting here thinking that with a $34 Trillion of debt, tax brackets will be substantially higher in the future. So if true, then aggressive Roth conversions could be prudent in anticipation to higher taxes in the future. I guess this is the qualitative or lazy analysis of where we are/going :) So, what I'd try to do is manager Roth conversions in the next few years to not push your marginal tax rates over 24% (today) or 25% (2026 tax rates), that should be safe. I agree that modeling software revisited as tax codes change is the way to go!

[@youarehere1251]

I paid $1500 for a CFP for a FP, he refused to give me a Roth conversion scenario, he told me to contact a CPA. 🤔

[@ArielPaz08]

This was helpful, especially learning about inflation and the tax brackets. Thank you.

[@philshelleyruch1033]

Perhaps Sammie was thinking of the added premium "hit" of Medicare at higher income levels, not the taxation of Social Security benefits.

[@snouriani]

Thanks so much for going over my scenario James! I am a guy BTW. Some very good points on this video such as the brackets being adjusted for inflation. I plan on converting up to the 24% bracket for 2024 and 2025 in case the tax cuts get expired, then bringing it back down a bit. So big chunks of conversions these next two years then (depending on tax rates) back down to 50k(ish). Thanks again for your guidance and insight!

[@fgilmont]

Congrats Sammy, really impressive early retirement! Do you mind me asking what your withdrawal rate is for the income you use (exclude the conversion withdrawals)?

[@snouriani]

@@fgilmont Thanks! Basically, I spend about 100k a year but that includes about 30k taxes from conversions and lt cap gains. I might make a big purchase in the future though.

[@rickstephan6707]

Excellent discussion....further convinced me that my 'up to 24% tb over the next 2 years' Roth conversion plan (for starters) is a good one. It was created using financial planning software.

[@gizmobowen]

I use an online retirement planning tool. I've run all sorts of scenarios, including some similar to what you've described for Sammy. What was missing from my understanding of the results was the underlying assumptions. I found this video very helpful to at least try to expand upon some of the assumptions that the software is making. I'm not sure if I can exactly say what all the assumptions are, but I suspect they're making most of what you've described. Thanks for giving me a bit of a behind the scenes illustration so I have more confidence in the scenarios that I'm running.

[@phillyboylaboy]

What tool do use may i ask sir? Ty.

[@toddmaniatoddmania9844]

EXCELLENT analysis!

[@Elephantine999]

This was really interesting and informative. I can see why we need software to juggle all of those balls in the air! I do wish that I had started doing my Roth conversions earlier!

[@Indiana275]

Great video James. I think another factor that planners don't factor into is the less amount of wealth to be compounded and growing from the taxes being paid. Typically even if paid from outside source, rather than being withheld from the IRA, tax calculators don't show a great illustration of having the lesser amount in the total portfolio due to the taxes being paid. You happen to know any good software that would illustrate this (on an annual basis, say)?

[@jhors7777]

Great video and channel, thanks very much

[@fialee8]

Assuming today's tax brackets, the trade-off between 22% or 28% is not that big of a deal. The bigger problem is jumping from 12% to 22% brackets... or from 22% to a 32% or 35% tax brackets. If she really believes she can get 10% return per year... then converting right below the 32% rate since if she has to take out $230K+ in RMDs, the tax rate will be 32% or more. But converting later could result in IRMA after 63yo.

[@ScottinValbom]

I apologize if I missed this, but how does one factor in the loss of the future income generated by leaving the 22% or 24% tax on conversion in a traditional account? If I withdraw $100k for conversion and it costs me $22k in taxes, I have a net $78k earning and compounding returns taxed in the future at 0% instead of $100k earning and compounding returns taxed at XX% in the future. Is there a way to determine the break-even point? Great videos, quite thought-provoking as well as informative. Thank you.

[@snouriani]

I was thinking this exact point.

[@toddmaniatoddmania9844]

No one EVER talks about spending down Traditional IRA or 401K money between age 59 1/2 and their RMD age, and just enjoying life while delaying Social Security. I still have Roth IRA’s, HSA, taxable brokerage accounts, high-yield savings accounts, etc ., to use for tax efficiency after age 70. I probably won’t need to do Roth conversions because my Traditional IRA and 401K balances aren’t massive. I’ve used those two accounts strategically for years that I needed tax deductions/lower taxable income, etc. However, I will have a nice Roth IRA balance and taxable brokerage account balance waiting for me after age 70 to enjoy my golden years with.

[@pensacola321]

I have gotten whacked pretty good with RMDs and IRMAA. Plan where you can.

[@wacoharder]

No one ever address this scenario. Should retirees (72 and 70) ever consider Roth conversion. Our 3 IRA’s (2 regular and an inherited) RMD’s and SS will closely cover our normal living expenses? Thanks

[@DennisMoniz]

Can you do a video on a reverse mortgage as part of a retirement plan? My sister and I inherited a paid off house from our parents. Currently we have a heloc which we expect to be paid off when she is 62 and I will be 68 in 2030. Neither one of us is married or has kids. Thanks.

[@rafalwyszkowski70]

Can you please names of this modeling software? This topic becomes so complex between fed tax, IRMA, RMDs its impossible to to model all the variables without AI. I am facing these converting decisions now.

[@rayzerot]

Every single bit of this is typically modeled without AI and has been for decades. Maybe you just mean there are too many variables to account for without using software?

[@snouriani]

He listed a link below in the description.

[@bobbert1945]

Great video.

[@ericbolz]

If your biggest mistake is that your income is so high the RMD pushes you into the 36% tax bracket,, well, that's a good problem to have.

[@datbio7302]

Here is the excel formula to project Sami's future value for her IRA with 10% assumed growth rate :) =FV(10%, 24, 50000, -1115000, 0)

[@donaldlee6760]

Is there no mathematical benefit to do an RMD if your future tax bracket is the same and if paying taxes out of the distribution (not paying the tax using a separate checking account) for people over 59.5?

[@5metoo]

I think the main thing is the time horizon. When will you need the money? There isn't much benefit in a conversion if you're going to need the converted money soon. Now I don't plan on ever using my Roth funds -I plan to pass it on to heirs- and I'm from a long living family. So my time horizon is 25+ years, or 35 really since heirs have 10 years to empty the account. So I'm willing to pay a higher tax rate to do my Roth conversions than someone who will need to start using it in 5 years. The flexibility of Roth funds and the potential for growth are a massive advantage for me, and people who don't recognize this about conversions are really missing a lot.

[@justliberty4072]

I think you mean Roth conversion rather than RMD (required minimum distribution). There is a big benefit to your heirs, should you have any to having more $ in a Roth rather than a regular IRA. There is also a benefit in controlling the risk of future tax rates and brackets moving in an unfavorable direction. You also get a benefit in that sometimes you don't know what your income will be in the future; e.g. some people will receive inheritances and don't know how much or when. Not having your own RMD (i.e. income) can keep you in a lower tax bracket if you are forced to take RMDs from an inherited IRA.

[@Abraham.Lincoln22]

👍👍

[@Sylvan_dB]

Good description of the process, thanks! Going thru these decisions myself... It seems to me that instead of playing with inflating tax brackets, it would be more simple and similarly accurate to reduce the expected return by expected inflation.

[@janesmith506]

A question for James and commenters: Are financial planners advising their clients that tax rates will rise dramatically in the next 20 years for higher earners?

[@jkopvo]

Hi James, thanks for the excellent video - some good thoughts! I do have two suggestions: 1. I realize that some of your followers are just listening to the audio, but for those of us watching on KZbin, why not show some info on the screen? Like maybe run Sammy's numbers through software, or at least show them on a powerpoint or even a whiteboard so that we can see and remember the numbers you are mentioning. 2. Since it appears likely that Sammy's tax bracket will be higher at age 75, I was thinking that you would encourage her to fill up her 22% bracket today (i.e., convert enough each year to bring her income closer to the top of that bracket) so as to reduce the amount taxed at 24% (or maybe higher) in the future. Thanks again, John :)

[@CWB367]

James, thanks for another great podcast, curious if you suggest any financial planning tools we can use ourselves?

[@jamesmorris913]

I've decided not to do Roth-conversions, AT ALL. Since RMD age seems to keep going UP and UP, all the time; it seems to make less and less sense! I'm 60, now; which means that under the new RMD law..I won't have to start drawing, until I'm 75! And..WHO KNOWS what the RMD age will be, by the time I'm 75!! Just sayin'...or maybe I'm missing something, here.

[@snouriani]

You might be missing something BIG here. If you are retired and currently pay no taxes, you could at least convert the amount to fill the standard deduction. I tell all my friends this who take off a year for working. FREE conversion! That way when you do need larger amounts to pull from your IRA, you can take some from your Roth and hopefully stay under the next tax bracket.

[@janesmith506]

Hi James. I created my own projection spreadsheets, but I failed to account with an inflation factor for expanded/higher income tax brackets. Now I can use the inflation factor that's already in my spreadsheet and link it to the tax brackets. Thanks for the great ideas in this video.

[@walala1172]

When you consider conversion from 401k to Roth IRA, how money deprecation impact your decision？ I think sometimes if you pay tax for future use, it may not a good idea .....

[@ericgold3840]

James is describing the approach to use, which is a wonderful education he offers without charge. I was curious about the outcome if I started from Sammy's $1.15M, and then corrected for inflation *and* presumed that the annual $50k Roth conversion was also indexed to inflation. Using 3.5% p.a. as the rate inflation, the tIRA grows to $1.358M in today's money in 24 years -- a far cry from the numbers James used. Both are correct, the difference resulted from assumptions. This is what James means when he cautions people that the example is illustrative. Take his warning to heart, and work out your own case in detail to have any hope of making a good decision.

[@jameslawrence2553]

Appreciate you sharing your story, great to hear the input from both sides. Happy retirement 🎉

[@susieq9186]

You have some good analysis. Need to streamline your videos and stop saying the same thing over and over.

[@amyw.9477]

This was a great explanation of all factors that need to be considered when doing a Roth conversion. Thanks!

[@PC-mh4uh]

Love the video but the background is tough to look at.

[@jjdawg9918]

Fantastic explanation of the assumptions that need to be considered! I did this for myself in a spreadsheet a couple of years a ago and as you mentioned the future tax-brackets are the gotcha. I tried to go back and look at historic tax brackets and unfortunately they follow politics as much as they follow inflation. One more thing to consider is losing any ACA subsidy you may have since a ROTH conversion of 50K will pretty much nullify it.

[@alsavery9306]

I have nearly the identical numbers with Sammy (age, IRA amount, etc...) and based on my calculation, the maximum amount I should convert is around $30k and not $50k. At $50k, it costs me $6k in ACA subsidy and another $4k in tax. So essentially, the tradeoff for me is $10k more in taxes versus $20k more in Roth. I don't think getting another $20k in Roth is worth $10k. Then again, maybe that's a good tradeoff if you know for sure that the stock market will be great in the next 25 years.

[@fritzerickson1879]

I’m 67 and have been at my full retirement age for about six months. I don’t have any plans to retire at this point because I’m enjoying my job, find it fulfilling, and it pays me a very good salary. I’ve deferred taking Social Security for a couple of reasons. First, even though there’s no penalty, I don’t wanna pay the higher tax rate that I would have to pay on those Social Security dollars added to my total income. Second, and this gets to my question, most analysis that I look at seems to be centered on maximizing the total amount I would receive from Social Security over my lifetime as the primary goal. In other words, the breakeven point. Take it early if you don’t if you don’t think you’re going to live very long or take it later if you have a good shot at a longer life. It’s all about a breakeven point. I’m wondering if that’s the wrong goal at least for some. What if the goal is to have as large a monthly Social Security check as possible when you need most, say when you are no longer working - regardless of the breakeven point? Rather than taking Social Security when you don’t need it but have the advantage of getting a greater overall lifetime return verses having monthly checks that are 24% higher at age 70 - even if you fall short of the breakeven point. It’s possible that I have completely missed the point which would not be the first time. Any thoughts would be most welcome.

[@rubenmartinez1372]

Great advise, this is exactly my predicament as I look into retirement at the end of 2024 when I will be 65. I have spent hundreds of hours creating an excel spreadsheet for the purpose of avoiding jumping into a higher tax bracket once RMDs kick in when I turn 72 in 2031. I am basically going to spend my next 7 years Roth converting approx 1/2 of pretax IRA ($1.9M) and definitely defer SS until 70 to more or less stay below the current 22% (soon to jump to 25% in 2026) tax bracket. While I put good effort into the excel spreadsheet I would love to get a recommendation on a good retirement planning software I can subscribe to or purchase. Thanks James for the great resource you provide, I am a big fan. Ruben

[@JayRay9999]

Thank you for the thought process on this! I convert and really found value in the video! I would love to know at 75 yrs how much would be in the now $322K Roth. You said that the Trad IRA would go from $1,250K to $6M! I know that was not the question, just would like to know.

[@marteanderson7963]

Also beware of the widow tax on RMD's single filers get hit much harder then joint filers.

[@whitleyca]

Such good stuff. really well done and super informative and helpful

[@markb8515]

Thanks James for the detailed analysis! It was very detailed and simplified with a lot of information.

[@diannekocer2058]

If you are over 75 does a Roth conversion make sense?

[@kaytee1617]

Very good video. Thank you!

[@Jack51971]

James gives me a headache😊

[@fialee8]

I think an assumption of 10% returns when the stock market is hitting all-time highs is overly optimistic, even if the 80% is invested in QQQ. If the stock market was in correction territory, or around -15% or more below it's peak... maybe a 10% rate of return may be reasonable.

[@snouriani]

S&P 500 has returned 10% averaged annually since it's inception (almost 100 years). Anyone can get 10% by investing in an S&P 500 fund. My IRA portfolios have actually outpaced S&P for the past 15 years as I invest in QQQ and other tech companies. 10% averaged over time is a no-brainer.

[@MichaelToub]

Great Video!

[@et_phonehome_2822]

There is a KZbinr financial planner that has a 3 part series in converting an IRA to a Roth with a spreadsheet that takes into account everything.

[@user-xg8zo7lw1x]

Who us that guy with the xls?

[@brianchapman4051]

I was wondering if without consulting a financial planner, if there are any guidelines for when it makes sense to do conversions? I am thinking there are too many variables but still it would be interesting if there are certain thresholds?

[@toddmaniatoddmania9844]

Do Roth conversions when 1) you’re no longer working and thus no longer drawing an income. 2) in a bear market

[@JannyLuits]

Am 58 retiring next year but the thought of retirement gives me weakness. My apologies to everyone who have retired and filing social security during this time after putting in all those years of work just to lose everything to a problem you never imagined to happen. It’s so difficult for people who are retired and have no savings or loved ones to fall back on.

[@kennethholifield1242]

Well they are the government! They can and will change tax brackets ! Vote on HR-25! Keep your money for your family and not the government!

[@rayzerot]

... I don't think you'd get to keep as much money as you think. The median household income is about $75,000 which means most income earning Americans are taxed in the 12% federal income bracket. The effective federal tax rate they pay once the 10% bracket and the standard deduction are calculated in is even lower than that The sales tax is 23% on all sales... that's almost doubling federal taxes for the majority of Americans if they want to spend the money they worked hard for