Roth Conversions Over Time
Roth conversions have become one of the most talked-about retirement tax strategies. The basic idea sounds appealing: move money from a tax-deferred retirement account, such as a traditional IRA or 401(k), into a Roth account, pay the income tax today, and potentially enjoy tax-free qualified withdrawals later.
But there is an important question that sometimes gets overlooked:
If a Roth conversion makes sense, should you convert a large amount all at once?
For many retirees and pre-retirees, the answer may be no.
A large, one-time Roth conversion can create a substantial taxable-income event. That additional income can potentially push you into a higher federal income tax bracket, increase Medicare premiums in a future year, affect the taxation of Social Security benefits, and interact with other income-based tax thresholds.
Instead, a multi-year Roth conversion strategy may provide greater control. Rather than viewing Roth conversion planning as a single transaction, you can evaluate how much to convert each year based on your income, tax bracket, Medicare situation, Social Security benefits, available cash, and anticipated retirement income.
The key is not necessarily to convert as much as possible. The goal is to determine whether conversions make sense in the first place and, if they do, how much should potentially be converted each year.
What Is a Roth Conversion?
A Roth conversion generally involves moving money from a traditional tax-deferred retirement account into a Roth account. The amount converted is generally included in taxable income for that year.
In exchange for paying taxes today, the converted money can potentially grow within the Roth structure, with qualified distributions generally received tax-free. Roth IRAs also do not impose required minimum distributions on the original account owner during his or her lifetime.
Those benefits make Roth conversions attractive, but they do not automatically make every conversion a good financial decision.
A Roth conversion is fundamentally a tax-planning decision. You are choosing to recognize taxable income today in hopes of creating a better long-term tax outcome.
That means the tax rate you pay on the conversion matters tremendously.
Why Convert a Traditional IRA to a Roth Over Multiple Years?
A multi-year Roth conversion strategy breaks a potentially large conversion into smaller amounts over several tax years. Instead of deciding, for example, that an entire IRA should immediately become a Roth IRA, a retiree might evaluate an appropriate conversion amount annually.
This approach can provide opportunities to manage taxable income more deliberately and coordinate conversions with the rest of a retirement income plan.
Here are seven reasons why that can matter.
1. A Multi-Year Roth Conversion May Help Manage Your Tax Bracket
The most obvious concern with a large Roth conversion is the immediate income tax bill.
Because the taxable portion of a Roth conversion is added to your income, a large conversion can push additional dollars into higher marginal federal income tax brackets.
Suppose someone decides to convert a substantial portion of a traditional IRA in one year. The first portion of that conversion might fall within a relatively favorable tax bracket, while later dollars could spill into progressively higher brackets.
Instead, spreading conversions across multiple years may allow the retiree to repeatedly take advantage of available room within lower tax brackets.
This doesn't mean a large conversion is always wrong. There can be years when an unusually large conversion makes sense.
For example, someone who recently retired, temporarily stopped working, sold a business, or experienced another significant reduction in taxable income may have a unique low-income year. That could create an opportunity to convert more money without reaching the same marginal tax rates that would normally apply.
The important question is not, “How much can I convert?” It is, “At what tax rate am I willing to convert?”
2. Roth Conversions Can Affect Medicare IRMAA Surcharges
Income taxes aren't the only consideration for retirees approaching or already enrolled in Medicare.
Higher income can also affect Medicare premiums through the Income-Related Monthly Adjustment Amount, commonly known as IRMAA.
IRMAA can increase premiums for Medicare Part B and Part D when income exceeds applicable thresholds. Importantly, Medicare generally uses income information from two years earlier when determining whether an IRMAA surcharge applies.
That creates a potential surprise for retirees.
A large Roth conversion may increase modified adjusted gross income in the conversion year. Even though the conversion may have been completed for long-term retirement planning purposes, the higher income can potentially result in increased Medicare premiums later.
This becomes particularly important as someone approaches Medicare age. Roth conversion planning should therefore consider more than federal tax brackets alone.
A smaller annual conversion may sometimes allow a retiree to manage taxable income without unnecessarily crossing an IRMAA threshold.
On the other hand, someone who is already well above a particular IRMAA threshold may reach a different conclusion. This is why individualized calculations are important.
3. Roth Conversions May Increase the Taxable Portion of Social Security
Social Security adds another layer to Roth conversion planning.
Depending on your overall income, as much as 85% of your Social Security benefits can be included in taxable income. The calculation uses what is commonly referred to as provisional income.
Income generated by a Roth conversion can affect this calculation.
Consider a retiree whose income would otherwise result in relatively little of his or her Social Security being taxable. Adding a significant Roth conversion could cause more of those benefits to become taxable.
The retiree is then dealing with two consequences at the same time: taxes attributable to the Roth conversion itself and potentially additional taxes because more Social Security benefits are included in taxable income.
For retirees who are already at the point where 85% of their Social Security benefits are included in taxable income, this particular issue may have less impact. But for people near the relevant thresholds, it can be an important part of determining an annual conversion amount.
This is another reason retirement tax planning should consider Social Security, retirement accounts, investments and Medicare together rather than treating each decision independently.
4. Spreading Roth Conversions Over Time Preserves Flexibility
One of the most underrated benefits of a multi-year strategy is flexibility.
Retirement can last 20 or 30 years or longer. During that period, tax laws can change. Your income can change. Your spouse's income can change. Investment markets can change. Your deductions can change. Your spending needs can change.
A strategy that appears optimal today may look different several years from now.
When you spread Roth conversions across multiple years, you retain the ability to reevaluate the strategy annually.
Perhaps next year your taxable income falls significantly. That could create an opportunity for a larger conversion. Maybe your income unexpectedly rises, making a conversion less attractive. Or tax legislation could alter deductions, brackets or other rules affecting the calculation.
There can also be situations where time becomes more important. For someone approaching the age when required minimum distributions begin, for example, there may be fewer years available to complete meaningful conversions before RMDs become another source of taxable income.
Flexibility does not mean avoiding decisions. It means creating a retirement strategy that can adapt when circumstances change.
5. Smaller Conversions May Make the Tax Bill Easier to Manage
Another important question is surprisingly simple:
Where will the money come from to pay the taxes on the Roth conversion?
Ideally, someone completing a conversion may have sufficient non-retirement assets available to pay the associated tax bill, such as cash, savings or appropriate taxable assets.
Why does this matter?
If part of the retirement account itself has to be withheld or distributed to cover taxes, less money ultimately reaches the Roth account. That reduces the amount available for potential future tax-free growth.
Imagine converting $100,000 but needing to use a meaningful portion of that retirement money to cover the tax obligation. The amount actually reaching the Roth is then substantially less than $100,000.
That doesn't automatically make the conversion inappropriate, but it changes the economics of the strategy.
For someone who does not have enough available cash to comfortably pay the tax on a large conversion, smaller conversions over several years may make the tax obligation more manageable.
Importantly, retirement planning should not create a new financial vulnerability. Draining an emergency fund simply to complete a large Roth conversion may defeat the broader purpose of maintaining financial security.
6. You Can Reduce Future RMDs Without Converting Everything
Required minimum distributions, or RMDs, are one of the primary reasons retirees consider Roth conversions.
Traditional IRAs and many other tax-deferred retirement accounts eventually require distributions under federal tax rules. Those distributions can create taxable income whether or not you actually need the money for living expenses.
Roth IRAs, by contrast, do not require lifetime RMDs for the original owner.
That can make the idea of converting an entire traditional IRA extremely appealing.
But eliminating RMDs should not necessarily be the goal at any cost.
Imagine paying a relatively high tax rate today to convert every dollar simply because you want to eliminate future RMDs. If your taxable income is substantially lower later in retirement, some of those future traditional IRA withdrawals might have been taxed at a much lower rate.
In that situation, paying a high tax rate early could actually produce a worse result.
The objective is therefore not necessarily to eliminate every future RMD. Instead, it may be to reduce future tax-deferred balances enough to create a more efficient lifetime tax picture.
A retiree could potentially maintain money in traditional accounts and Roth accounts, providing different sources of retirement income with different tax characteristics.
This is why “convert everything” can be an overly simplistic approach to Roth planning.
7. Roth Conversions Can Trigger Other Income-Based Tax Thresholds
Federal tax brackets, Medicare premiums and Social Security taxation receive much of the attention, but they aren't the only thresholds that can matter.
Depending on someone's financial situation, a Roth conversion could interact with capital gains tax rates, investment income taxes, deductions, credits or other income-based provisions.
This is especially relevant for retirees who have significant investments outside of retirement accounts.
For example, additional taxable income from a conversion could potentially change how other investment income is taxed. The conversion therefore shouldn't be analyzed in isolation.
The broader question is:
What happens to the rest of my financial picture if I add this conversion income?
That is a much more useful question than simply calculating the income tax owed directly on the Roth conversion.
When Could a Larger Roth Conversion Make Sense?
None of these seven considerations means that large Roth conversions should never be used.
There are situations where a larger conversion may deserve serious consideration.
A retiree may experience an unusually low-income year after leaving work but before Social Security, pensions or other retirement income begins. Someone could also have a temporary income reduction or a limited window before required distributions become part of the tax picture.
Market declines can sometimes change the numbers as well because a conversion may move a greater number of investment shares at a temporarily reduced account value.
The lesson isn't “never make a large Roth conversion.”
It is don't assume that converting everything at once is automatically better.
Roth Conversion Planning Should Be Reviewed Every Year
A thoughtful Roth conversion strategy isn't necessarily a one-time decision.
Each year, you can evaluate your expected taxable income, available deductions, Social Security benefits, Medicare exposure, investment income, cash available to pay taxes, anticipated RMDs and long-term retirement income needs.
From there, you can determine whether a conversion makes sense and, if so, how much.
This type of planning can require coordination between your financial professional and tax professional. Tax preparation typically focuses heavily on accurately reporting what has already happened. Retirement tax planning requires looking forward and considering what could happen under different strategies.
That forward-looking perspective can be especially important because taxes affect nearly every major source of retirement income.
The Bottom Line: Don't Convert Just for the Sake of Converting
Roth conversions can be a powerful retirement planning tool, but they are not automatically appropriate for everyone.
More importantly, deciding that a Roth conversion makes sense is only the first decision. The next question is how much to convert and when.
For many retirees, strategically converting smaller amounts over multiple years may provide better control over tax brackets, Medicare premiums, Social Security taxation, future RMDs and other income-based thresholds.
The best strategy is highly individual.
Your current tax rate matters. Your expected future tax rate matters. Your income sources matter. Your age matters. Your Medicare status matters. Your Social Security strategy matters. Even the source of the money you'll use to pay the conversion tax matters.
Rather than asking, “Should I convert my IRA to a Roth?” consider asking:
“How much should I convert this year as part of my overall retirement tax strategy?”
That change in perspective can turn a one-time transaction into a long-term planning strategy.
Frequently Asked Questions About Roth Conversions
Is it better to convert an IRA to a Roth all at once or over several years?
There is no universal answer. For many people, spreading Roth conversions across several years may help manage tax brackets and other income-based thresholds. However, a larger conversion could make sense during an unusually low-income year or when other circumstances create a favorable tax opportunity.
Does a Roth conversion count as taxable income?
Generally, the taxable portion of money converted from a traditional tax-deferred retirement account to a Roth is included in taxable income for the year of the conversion. That is why the size and timing of a conversion are so important.
Can a Roth conversion increase Medicare premiums?
Yes. A Roth conversion can increase modified adjusted gross income, which can potentially affect Medicare's income-related monthly adjustment amount, or IRMAA. Medicare generally uses income information from two years earlier when determining these surcharges.
Can a Roth conversion cause more of my Social Security to be taxable?
Potentially. Roth conversion income can affect the provisional-income calculation used to determine how much of your Social Security benefits are included in taxable income. Depending on your other income, a conversion could cause a greater portion of your benefits to become taxable.
Do Roth IRAs have required minimum distributions?
Roth IRAs do not require lifetime RMDs for the original account owner under current federal rules. This is one reason Roth conversions can be attractive for people concerned about future required distributions from traditional retirement accounts.
Should I convert my entire IRA just to eliminate future RMDs?
Not necessarily. Eliminating RMDs may sound attractive, but paying a high tax rate today to avoid potentially lower-taxed withdrawals later may not improve your overall retirement plan. The objective should generally be tax efficiency over time rather than simply eliminating RMDs.
What is the best age to start Roth conversions?
There isn't one best age for everyone. One potential planning window occurs after retirement, when earned income has declined, but before Social Security, required distributions or other income sources significantly increase taxable income. The appropriate timing depends on your individual circumstances.
How do I know how much to convert to a Roth each year?
The calculation should consider projected taxable income, federal tax brackets, Medicare IRMAA thresholds when applicable, Social Security taxation, investment income, available cash for taxes, future RMDs and anticipated retirement income. Because these variables can change, the appropriate conversion amount should generally be reevaluated periodically.
Should everyone do a Roth conversion?
No. Roth conversions are often discussed as though they are automatically beneficial, but they may not make sense for everyone. If the tax cost today is too high relative to the expected future benefit, keeping some or all of the money in a traditional retirement account may be appropriate.
Why is Roth conversion planning part of retirement income planning?
Because a Roth conversion changes when you pay income taxes. That decision can influence how much spendable income you ultimately retain throughout retirement. Roth conversions should therefore be evaluated alongside Social Security, Medicare, investment income, RMDs, cash flow and the rest of your retirement strategy.
This information is provided for educational purposes and is not intended as individualized tax, legal or investment advice. Tax laws and thresholds can change, and individual circumstances vary. Consult appropriate financial and tax professionals before implementing a Roth conversion strategy.
Daniel Wendol
Item #1
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Most people who convert a traditional IRA into a Roth do it the expensive way. What they do is they take a big chunk in one year and they push it into the Roth and they jump up in the higher tax bracket. They trigger Medicare search charges and they pay the IRS tens of thousands of dollars more than they needed to. There is a better way and it starts by eliminating this concept of the one-time conversion of a Roth of a traditional RRA to a Roth. And today we’re going to break down exactly why
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spreading Roth conversions over time, maybe multiple years, is a better way than the one-time conversion moves. And I’m going to give you seven reasons why this matters to real retirement plans. This isn’t theory, this is experience. Let me bring in my co-host, Tony. Tony, welcome to the show. We’re talking about Roth conversions and I’m going to go through seven points. Are you ready? >> I am ready. This is a hot topic with a You’ve got a hot take on a hot topic once again.
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>> We’ll see. Okay, let’s start with the first one, Tony. >> All right. Number one, you stay in lower tax brackets instead of jumping into higher ones. You >> This is the obvious one. >> Yep. You fill the lower brackets year after year and avoid the 32 35 37% rates. Right. >> Yeah. So the tax brackets are 10% 12 22 24 32 35 37. So everyone knows this. They’re they’re trying to avoid taxes. That’s what a Roth conversion is about. But you have to pay taxes the year you
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convert. And if you convert a big chunk in the beginning, you’re going to push yourself potentially in that 32, 35, 37. You might even go from 12% to 22, which is a 10% increase. So, this is the main problem with converting all at once. You’re more than likely going to push yourself into the next tax bracket that year. And look, if you if you’re converting 500,000 of your IRA, 401k into a Roth, that could be $50,000 of extra tax that could be avoided if you just spread it out. So that’s the key. Spreading out
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the same amount that you’re going to convert, just spreading it out over multiple years, staying in a lower tax bracket. That’s what I’m saying is one reason why spreading it out makes sense. Of course though, Tony, for everyone, there’s a there’s a caveat. Uh, and I’ll tell you in reality, we did a big conversion. We, meaning my wife, when she left her job, she had a 401k, and the year after she left, we converted the whole thing in one lump sum to a Roth. >> Really?
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>> And Yeah. >> Didn’t it create a huge tax bill for you? It didn’t because she was no longer working and I happened to be in between jobs at that time. >> So that year we didn’t have a lot of income and we like boom, let’s do it. >> So we were able to convert her Roth to a Roth, her 401k to a Roth without bumping into those high tax brackets because our income was so low. Sure. >> Right. So there’s always there’s always a caveat on all of these, but I just
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wanted to point that out. you know, in reality, the jumping to the next tax bracket may not be a thing if your income is really low that year. So, sure, >> these aren’t hard and fast rules, but these are the seven keys that I want to bring up to people. >> Yeah. So, number two on the list is you avoid or sharply reduce Medicare Irma sir charges, right? >> Yes. Mean ant Irma. >> Yes. >> You should check that pula out. Mean Irma poker party volume one I believe. Um yeah so Irma income related monthly
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adjustment amount >> that’s what that stands for means if you make above a certain threshold you’re going to pay more for Medicare. So this is only going to be relevant to people on Medicare right so 65 and up typically. And the interesting part about those search charges are it uses income from two years ago. >> Mhm. >> And that includes a Roth conversion. So, if you do a Roth conversion as a lump sum, you might bump yourself up into Irma two years from now and get hit by
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paying more for Medicare. And the interesting part about those search charges is it’s a cliff. So, you go $1 over that limit. So, if the limit’s $106,000, say if you go $16,000 and $1, you’re paying a Irma search charge. $1 is all it takes. So it might make sense to spread the Roth conversions over time to avoid a Irma >> and Medicare search charge, >> right? >> Yeah. But again, caveat, if you’re already in that that bracket, meaning you’re already going to be
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paying Irma search charges and it it may not matter, right? So you what you look at is you you look at your tax tables and then you look at the Irma tables and there’s a chart and if you’re in that before that first Irma chart level and maybe the first se second and third tiers it may not matter that much if you’re already there but the last thing you want to do is be bumping up into Irma and paying 5,000 more a year for no reason other than you could have converted over time and avoided all
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that. So >> yeah, >> uh but sometimes it doesn’t matter if you’re already there. You know, it does it doesn’t just you got to look at those tables. Most people don’t even know Irma tables exist until they’re getting hit with it, right? So, think think ahead. >> And it goes back two years. So, 63 is when you should be worried about that >> for 65 two years. >> Yeah. Because they do a two-year look back. Irma does. So, and that’s why it blindsides people because, you know,
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they do it and then uh for the next two years their their things are fine. Their Medicare Part B premiums are the same. Uh, but then all of a sudden the third year, oh, we did a two-year look back. Now we’re going to raise it from $22 to $500. It’s like, whoa. >> $500 a month. That adds up, >> right? >> Yeah. Yeah. Exactly. So, be aware of that. That’s that’s that’s reason number two. >> All right. Reason number three is you minimize the taxation of Social Security
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benefits. >> Yes. So, Social Security’s taxed. We’ve done shows on that. It’s still taxable even after the big beautiful bill. >> Right. Right. Right. It didn’t get eliminated. >> No, >> it didn’t. That’s a lie. >> Yeah. >> Social security is still taxed. Now you get the the uh one big beautiful bill $6,000 senior bonus deduction which grandfathers and goes away. It goes away >> right now. >> So what happens is when you do a Roth
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conversion, Social Security looks at that as income. Right? If you take money from an IRA, which is what you’re doing, you’re paying tax on it. That’s considered income. And that income goes, >> right? Right. >> Any traditional any traditional tax deferred retirement account we’re talking about here, >> right? And if you’re doing a conversion, you’re paying the tax now and that’s considered income and that’s considered part of the provisional income formula.
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So, you got to know the the provisional income formula for social security. And the way social security works is 15% is always taxfree. Well, I won’t say always. Currently 15% of social security is taxree which is why I like social security >> but 100 100% of your social security benefit can be taxree if your income is low enough. So you need to know what the thresholds are for a married couple for a single person >> and stay below those. And when you do a Roth conversion, it’s very very easy to
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jump up into the provisional income where tax bracket where now you’re paying instead of paying zero taxes on your social security, now half of your social security benefit is taxed or up to 85% of your social security benefit is taxed. So it’s for a unique, not a unique, it’s for a very strict subset of people in that social security provisional income tax bracket range. And people don’t realize that. And all of a sudden now they’re paying a whole bunch more in taxes. They’re like, “I
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get to paying taxes on the Roth conversion. I understand that. But why am I paying so much more on my social security t uh in taxes? Why is so?” And it’s because you did a conversion and now you’re paying more tax on your social security income. Again, though, caveat, Tony, if you’re already at that 85% of taxable income, it doesn’t matter, right? it’s not going to increase your social taxation on social security anymore. And a lot of people that are doing conversions are
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are already at that 85% level. So it doesn’t really matter, but it’s for the people that are below that where it’s very important. So that’s something to keep in mind. >> Yeah. Oh, that’s huge. All right. So now we’re on to number four. Uh and this one is great. You gain real flexibility if life or tax law changes. if you have a major life change or the tax law happens to change. Right. >> Yeah. A prime example is the one big beautiful bill you just referenced,
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right? President Trump added a a $6,000 per person deduction, senior bonus deduction for people over 65. So, if you converted before that and now you’re you and your wife or you and your spouse are getting 12,000 more deduction, bonus deduction, you’re like, “Well, I should have waited cuz I could have converted and got an extra 12,000 at that lower bracket.” Right. Once you once you do a conversion, you’re locked in. >> Yeah. >> And that’s it. Right. I mean, you can
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undo it that year, but it after that, you know, there could be changes to tax law. There could be changes to your situation. You know, you could lose you could lose a job or your spouse could lose the income like we did and it’s like, “Wow, we don’t have any income now. Let’s do the conversion now.” Oh, we already did it. We did a big one time thing and flexibility is gone. That’s why I believe in flexibility. I like this one and it’s it’s loose. It’s loosey goosey, but I think it’s huge to
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have flexibility in your retirement plan is important. That’s that’s this is probably the main reason why I um like to do conversions over time as opposed to once ripping the band-aid off. However, >> caveat, Tony, if you’re 71 or 72 and you’re staring down the age 73 >> RMD >> RMD age, it’s like, all right, I have very limited time to do stuff, so maybe I’ll do it now. And you might rush a little bit there. >> Sure. Um, but that’s going to be the
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main caveat to the flexibility. And the reason why um you’re ignoring the flexibility is because it’s too late. I mean, you the rules are the rules. So, um, you got to do what you got to do. But, >> yeah. >> Yep. >> Yeah. >> All right. Number five, the tax bill is easier to pay from non IRA money. And they always say, don’t you can’t use the IRA money to pay the taxes on the IRA. Why do I always hear that? Is that what you’re saying here? >> Well, you can use it, but yeah, the the
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rule of thumb is don’t because what you’re doing is you’re let’s say you take $100,000 out of your IRA, 401k, and you put it into the Roth. >> You could take that full there’s no limit. You could do the whole thing, right? But you owing the taxes on that that year. >> Now, you could take some of the money from the 100,000 to use to pay the taxes. Let’s say it’s 22%. you could take 22,000 out, but now you’re only converting 78,000 instead of the full 100.
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>> So, you’re depleting your depleting your retirement money that you’re going to be needing later, and you’re you’re canceling out a lot of the growth you’ve had. >> That’s why >> that’s right. And and then the future growth, right? So, now you’re going to be starting at 78 instead of 100. So all this future tax-free is going to be lower because there’s less in the Roth now, >> which takes away from the advantage of doing it in the first place.
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>> 100% agree with you on that, Tony. That’s exactly right. Takes away the advantage. It may not even make sense to do it if you have to use the IRA money to pay the taxes. So typically it makes sense to use nonirra money that you have checking savings, a brokerage account, whatever to pay the taxes because it makes it more powerful. So people, well, I don’t have that. I don’t have 22,000 in my bank to just give to the IRS. Okay, then let’s spread the Roth over time so you can manage the tax bill and
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keep it right. So that’s my thought on that. >> Roth over time. Yep. >> Right. Right. But the caveat is, well, if you don’t have any ability to pay the tax from outside the IRA, well then then it doesn’t, you know, then doesn’t matter. But then going to your point, does it even make sense to do the Roth in the first place? Maybe not. Just depends. You know, you got to do the math. >> Yeah. All right. Number six, you still shrink future RMDs without overpaying today. That’s a good one. That’s a good
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benefit. I mean, that’s the whole that’s that’s the one everyone talks about, the RMD. Everyone knows >> there’s no RMDs with the Roth. So, if you convert the lump sum, uh you’re really reducing the RMDs, uh that you’ll have to pay taxes on later and that you’ll have to take. Yeah. >> Yeah. So, RMD required minimum distributions. >> Really massive donut. >> Yes. That and that starts at 73 for most of the listeners. 75 U for a lot of people too that are watching. So at that
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age, you’re forced to take from your IRA. The government does force you. If you don’t, they penalize you heavily. So you’re going to take money out, but if it’s not in an IRA, if it’s in a Roth, you don’t have an RMD. You’re not forced to take it out. And people like that. So they say, “Wow, let me just do all of it. Rip the band-aid off. Now I don’t have any RMDs. Isn’t that great? I don’t have to worry about taking money out later.” Yes. But um and that is the reason why a lot
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of uh Roth conversions happen. >> Yeah. >> But that doesn’t mean you need to do it all at once. You could still do it over time because it’s a tax play. Then why convert all of it if you’re paying 36% tax because later you might be in the 12% tax break. See, >> the the goal on this whole the whole podcast is about Roth conversions. And a lot of people feel like, I want to convert it all. I don’t want the government forcing me to take my money. Wouldn’t it be great if everything I had
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was in a Roth? Yeah, it would be nice, but if you’re sitting on a big chunk in your 401k, IRA, it the goal isn’t to take it all and put it into a Roth because eventually when you retire and your income comes down, you might find yourself in a 0% tax bracket. >> Wow. >> Prime example, Tony, let’s talk about you for a minute. Let’s say you have 100,000 in your 401k and that’s all you have. And you’re like, I got to convert. I got to convert. So, you just convert
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the whole thing and now you paid, we’ll call it 22% tax on it, right? And then you turn 73 and all you have for income is your social security, but you have this huge Roth. It’s grown to 200,000. You’re like, “This is great. I don’t have to RMD. I am loving life, right?” But let’s say you’re now 73 and all your friends are forced to take money out and you’re not. But your only income is social security. What’s your tax? You’re in the 0% tax break. >> Probably zero because especially with
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standard deductions, I mean, >> standard deductions, right? >> Yeah. >> So, so you converted at 22% because you thought that was the right thing to do and you feel good about it. But now, wouldn’t it be nice if you had 50,000 in an IRA and you were forced to take 5,000 out or 10,000 out or whatever you amount you wanted and not pay tax on it? Well, I don’t like the big bad government telling me to take money out. In your case, you would want them. You you take it out anyway because you’d be able to
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maximize your 0% tax bracket or even the 12% tax bracket. Sure. So, this idea of converting everything is wrong. You need to convert enough where the tax play makes sense down the road. Again, that’s hard to determine, but you could do it. I do it all the time with people and start figuring this out. Don’t try and convert everything. Convert what you need to keep taxes low throughout. Don’t convert just for the sake of converting. You might actually be causing more harm than good. That’s the caveat on that.
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>> All right. Because people don’t realize tax brackets can be lower in the future. Everyone assumes the tax is going to be higher. Yes. Brackets might be higher, but your income might be lower. >> Yeah. Yeah. You have to look at your own situation. Do the math. And the only way you’re really going to figure that out uh effectively is to work with a trusted financial professional who can knows this has gone through this process. Uh and that’s where a financial advisor who’s a who’s trustworthy and a
00:17:38 – 00:18:32
fiduciary comes into play, right? >> Yeah. And they should be looking at all seven of these. >> They really should. >> Yeah. >> When you’re doing it, which >> And not everybody does. You got to be careful because not not everybody’s going through this. Yeah. Right. And the and the Tik Tok videos or the quick little snippets. Oh, convert convert. They’re not factoring in all these other these other things. Irma and like this last one number seven. Um you’re
00:18:05 – 00:19:13
reducing your exposure to other income based cliffs. So you have the um net investment income tax. >> So you you pay a a tax on investment income uh at a certain breaking point on income levels. So tax tables you pay a higher capital gains tax rate. You know capital gains tax rates start at zero goes 0 15 and 20. Y so you might be putting yourself from going from 0 to 15 or from 15 to 20 just because you’re doing a conversion and other income that you have on investment income >> gets taxed higher.
00:18:39 – 00:19:32
>> Now again caveat on this Tony not a lot of people have other investment income. So, this is only specific credits that are in play and it’s only relevant to people that have retirement income, investment income outside of their retirement accounts, but so it’s a it’s a smaller advantage, but I put it on here because it still applies to a lot of people >> and it doesn’t eliminate the first six reasons either, >> right? >> So, um let me just wrap up with the this
00:19:06 – 00:20:02
seven. You have lower income tax bracket, which people, you know, they get that because they know, oh, if I convert it all at now, I’m going to get bumped up to the higher bracket. Don’t get roped into doing it all at once. Yeah. Um, Irma search charges, >> social security gets taxed higher. People forget that >> you want to stay flexible. So, just because you might be able to do it all this year, maybe, you never know, things might change. Maybe your life situation changes. It’s good to be flexible. Once
00:19:34 – 00:20:22
you do it, you have no more flexibility. Even on the other end, all of it in the Roth isn’t necessarily the best thing. Uh you got to make sure the tax bill is manageable. Make sure you can manage the taxes today by using other money to pay for it. That really makes the Roth shine. >> You’re shrinking future RMDs. That’s a great way, but make sure you’re shrinking them over time. You don’t have to go all or nothing >> and finally staying staying clear those income cliffs. So that’s it, Tony. I
00:19:59 – 00:20:55
think >> Wow, that’s a lot. Most people convert. I I I don’t I don’t have data on it. In my experience though, in talking with people, most people when they talk to me about conversions, hey Dan, I heard about conversions. Let’s talk about it. They feel like they have to do it all at once. They feel like, oh, I got to do it at a certain age or any certain time >> and over time is really the smart way depending on the situation. Like you talked, there are caveats to each one of
00:20:25 – 00:21:25
those, but there are so many reasons to be strategic about it. Have a plan on when to convert and how much to convert. And the lump sums, how many people have, oh, I I’ve got 30,000 to pay the taxes separate from what I’m taking out. Not a lot of people want to do that or have that just sitting around in cash extra, right? You don’t want to raid your emergency fund for that. You need that. You don’t want to raid another retirement account for that. Uh you got to look at that smartly, don’t you?
00:20:56 – 00:21:56
>> Yeah. Exactly. >> Yeah. >> It’s it’s a unique It’s unique to everybody, right? It’s unique to their tax situation, their future tax situation, their future cash flow, their current cash flow. I mean, >> I think what people what happens is people get really roped into the concept. I got to convert cuz that’s the cool thing to do. the hot thing right now. Roth conversion. Roth conversion. You hear about it everywhere. Financial planners are just pushing it. Talking heads on
00:21:25 – 00:22:22
TV. Do Roth conversions. >> I’m going to say it doesn’t make sense for most people. Like everyone’s, oh, Roth conversions for everybody. No, for a lot of people it doesn’t make sense. No. >> If it does, it’s usually drips and drabs over time. A strategic Roth conversion over time is the way to go. The problem is it’s harder to do that. It’s it’s a lot easier just do it all at once, >> right? But that’s not the most effective, right? >> So, it takes every year doing the math
00:21:54 – 00:22:43
and not a lot of people want to do that. Financial advisors included. They don’t like a lot of, you know, the the broker is not going to be like, “Oh, let’s oh, you want to talk about this again? Let’s just get it done, right?” No, let’s do the math every year. >> So many socalled financial professionals are like that. like they’re just going to, you know, human nature. They’re going to be like, “Let’s just do this.” Uh, you know, and then they’re not
00:22:19 – 00:23:04
looking at, they don’t want to have to take the time. Let’s actually calculate this out. Look at all the different strategies, run the numbers. I mean, >> right. >> Yeah. That’s actual work and it’s a little bit of homework for you, but oh, it could make or break your retirement, >> right? And the CPA should be doing it, too. But they’re going to be like, “Well, I’m not a financial planner.” And the financial planner is going to say, “Well, I’m not a tax guy.”
00:22:40 – 00:23:48
>> Yeah. CPA CPA. Yeah, CPAs don’t do future tax planning typically. Maybe maybe one year ahead at max. They might be looking ahead to next April, but they’re looking back from last year to next April at most, uh, but usually just looking back at the past year. And so that’s not helping you. And financial planners are saying, I can’t I’m not a CPA. But you if you have to do future tax planning if you’re a true fiduciary or financial professional because it’s got
00:23:15 – 00:24:11
to be part of your retirement plan income plan. I mean >> I don’t know how it can’t be. I don’t know how you can how you can even say you do financial planning if you’re not looking at the taxes. Taxes play a part in everything from social security to Medicare to every aspect of retirement and finances and investments, uh, stock portfolios, any type of account, there are always tax implications. And it’s again, it’s not about how much you have, it’s about how much you keep. And that’s
00:23:43 – 00:24:45
why taxes are so such this is a huge topic, Dan. >> Yeah. And and do you think about it, Roth conversions is a tax problem. >> Well, sure. It’s not an investment problem. >> A Roth is a tax designation by the IRS code. It’s not even an account. People think of a Wroth as an account, but it’s a tax designation for accounts. >> Uh just like Yeah. These are tax designations. It’s all about tax. >> Yeah. If you want to do a Roth conversion and have a serious
00:24:14 – 00:25:05
conversation about it and run these numbers, go through those seven I gave you. You can contact me, use the QR code, get in touch with us. We do this for our clients. We are a big proponent of long-term planning, not just rip put band-aid. I mean, a lot of my clients will do it some, you know, let’s rip the band-aid off and sometimes it makes sense, but I think being strategic about it is worth it. Is a huge discussion. It’s not something to take lightly. Don’t just take the advice of your
00:24:39 – 00:24:58
neighbor who did a Roth conversion. May have worked for them, may not work for you. Got to do the math. >> So, Tony, thanks for a great show. We’ll catch everyone next