Are Roth Conversions Necessary? | Cody Garrett and Sean Mullaney | Ep 581

Summary

Podcast Summary: ChooseFI Ep 581

“Are Roth Conversions Necessary?” with Cody Garrett & Sean Mullaney

Release Date: January 12, 2026
Host: Brad (ChooseFI)
Guests: Cody Garrett & Sean Mullaney
Theme: An in-depth, myth-busting exploration of taxable Roth conversions—when they make sense, when they don’t, common misconceptions, and how common FI wisdom holds up in today’s tax environment.

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Overview

This episode digs into the confusing world of Roth conversions—specifically “taxable” Roth conversions, distinct from “backdoor” and “mega backdoor” Roths. Host Brad and guests Cody Garrett and Sean Mullaney (authors of “Tax Planning to and Through Early Retirement”) break down when Roth conversions can be beneficial, who actually needs them, and why the common advice to “always convert” is often oversold. The conversation is packed with real-life examples, behavioral insights, and guidance to help FI-minded listeners avoid unnecessary stress and focus on what really matters.

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Key Discussion Points & Insights

1. Setting the Stage: What Are Taxable Roth Conversions? (02:39–05:24)

• Distinction:
  • Backdoor/Mega Backdoor Roth: Mechanisms for high earners to contribute to a Roth IRA despite income limits; generally not taxable events.
  • Taxable Roth Conversion: Moving pre-tax retirement funds (IRA/401k) into a Roth, triggering taxable income in the year of conversion—a tool for planning, not a necessity.
• Sean (05:24):
  • “We’re really talking about these taxable Roth conversions. The idea is, we’re going to pay tax… we’re allowed to, but not required to.”
• Mechanics:
  • If you have a traditional retirement account, you can do a conversion—no income limits, no “tricks,” just electing to pay tax now.

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2. Why Do People Do Roth Conversions? Greed vs. Fear (07:15–09:07)

Cody:

• “There are two primary reasons people convert to Roth… Greed—the excitement about future tax-free growth… and fear—being crushed by taxes in the future.”
• Many feel urgency: “If I don’t convert now, I’ll be crushed by taxes later.”
• Some value the control of “choosing” when/what they pay in taxes, not just optimizing for the lowest possible amount.

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3. Policy & Longevity of Roth Conversions (09:07–11:31)

Sean:

• “I think they’re going to be very hesitant to eliminate Roth conversions… [it’s] literally saying ‘Hey, IRS, please tax me.’ What government would say ‘No thanks’?”
• Roth conversions are broadly supported and are unlikely to disappear.
• US rules lift income limits on conversions—contrast to Canada, where “backdoor” workarounds aren’t needed.

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4. When Do Roth Conversions Make Sense?

Accumulation (Working) vs. Drawdown (Retirement) (11:52–15:14)

Accumulation/Working Years:

• “If you have a job, that’s a pretty good indicator you should NOT be doing taxable Roth conversions.”
• Most people are in higher tax brackets while working; it makes little sense to voluntarily add taxable income unless there’s a disruption (career break, sabbatical, or grad school).

Cody’s Example (14:16):

• In a low-income “disruption year,” converted prior 403(b) money to Roth at 10–12% bracket—actual windows do exist, but are rare.

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5. Retirement Taxation Realities (15:40–19:46)

Sean:

• Critical Insight: “Taxation in retirement tends to be light.”
• Most retirees, even affluent, pay low effective tax rates thanks to the standard deduction, tax-favored treatment of capital gains/dividends, and spread-out withdrawals.
• Roth Conversion Main Benefits:
  1. Enables using taxable accounts to fund taxes, reducing tax drag.
  2. Reduces future Required Minimum Distributions (RMDs).
• “Roth conversions do not improve… financial security in retirement.” —Mike Piper (referenced from Bogleheads 2024)

Notable quote:

“The tax drag on those taxable accounts in a low yield world… tends to be very small.” —Sean (16:44)

RMDs Not the “Monster” They’re Imagined To Be:

• RMDs mostly just mean you’re drawing money later, often at manageable rates.

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6. Common Roth Misconceptions & Behavioral Biases (19:46–22:19)

• Myth: “You need to convert to Roth.”
• Reality: “Not a necessity, more a potential benefit. Most clients use conversions tactically, not aggressively.” —Cody
• Behavioral insight: Roth conversion urgency is fueled by emotion (fear, FOMO), not always cold analysis.

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7. Who Really Benefits from Roth Conversions? (22:19–24:32)

Sean:

• Primary beneficiaries:
  1. “Your 75+ year-old future self”—already likely to be wealthy, may have little need for extra post-RMD money.
  2. “Your heirs”—inherit Roth vs. traditional, a tax break for those already receiving a windfall.
• “The primary job of a retirement account is to get us and our spouse to and through retirement—not to do tax planning for other people.” (24:32)

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8. The Exception to the “No Need” Rule (24:50–29:58)

• Case Study:
  • 60-year-old with $5M IRA: Large RMDs in the future might nudge some money into higher brackets (32%), so prepaying tax at 24% bracket could be net-beneficial.
  • But, even then, it’s a benefit not a necessity—and there’s an argument that money used to prepay taxes could be better used for life experiences, charity, or family while you’re young and energetic.
• Cody: “Over-saving leads to over-worrying about RMDs; concern about this is a sign you’re already extremely financially successful.”

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9. Tax Planning in Retirement: Myths & “Garbage Time Touchdowns” (32:42–54:54)

• Brad: “We control much of our retirement tax outcome; fear-mongering about rising taxes is mostly unsupported.”
• Cody: “Return on Hassle”—don’t spend precious energy stress-optimizing small gains; focus on what’s actually meaningful to you.
• Sean:
  • “Predictions that taxes on retirees will go up keep being wrong—reality has been repeated cuts.”
  • “We had to make a ‘litany of tax cuts for retirees’ table for the book; there have been so many.”

“Garbage Time Touchdowns” Analogy (49:39):

• Even very affluent retirees (e.g., single 81-year-old with $3.68M IRA, $200k RMD) face only a 21% effective rate.
• “Yes, the IRS scores a few touchdowns late in the fourth quarter, but you win all game long.” [53:33]
• For most, retirement tax rates are low (~5-8% effective rates for $133k income is "astonishingly good"). Fear of high future taxes is usually unfounded.

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10. Estate and Inheritance Considerations (57:32–64:26)

• “What about the kids’ taxes?” — Not the primary purpose of your retirement account.
• Heirs might pay some tax if they’re high income, but they’re typically getting an enormous windfall.
• Estate tax is very rarely relevant for most—due to high thresholds.
• For those worried, there are strategies like charitable bequests.

Sean: (re heirs complaining about taxes)

“If you got a $3.7 million IRA and you’re worried about your heirs paying taxes on it, you can just name me as the primary beneficiary and I’ll take care of those taxes!”

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Notable Quotes & Timestamps

• Sean: “There’s no debate—you create taxable income in a Roth conversion. The only thing you need is a traditional retirement account.” (04:00)
• Cody: “There’s a big assumption that we’ll have more income in retirement than while working… I’d love for us to step back and ask the question.” (19:46)
• Sean: “The primary job of a retirement account is to get us and our spouse to and through retirement, period, full stop—not to manage someone else’s tax liability.” (59:20)
• Brad: “Any time you hear a drumbeat of ‘You have to’ for anything, really, really need to take a step back and ask—what’s the incentive? What’s the motivation of why this person is saying it?” (42:15)
• Cody: “Optimization can be a form of procrastination…at some point, you need to do living while there's living to be done.” (34:10 & 28:34)

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Memorable Moments

• Garbage Time Touchdowns:
  • Sean’s analogy to the NY Jets: Late-life, higher tax rates on RMDs are usually insignificant compared to the lifetime benefits extracted from the tax system. (49:39–54:54)
• “Return on Hassle”:
  • Cody on the cost/benefit of endless optimization (32:42)
• Expert Humor:
  • Sean: “I never use the term expert. But if there’s one thing Sean Mullaney’s an expert at, it’s garbage time touchdowns—because I’m a Jets fan.” (49:39)
• Practical Example:
  • Surviving spouse with multi-million IRA paying a ~21% effective rate—a “worst case” that’s still an exceptionally comfortable outcome. (47:00–54:54)

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Timestamps for Key Segments

• 02:39 – Intro to taxable vs. backdoor Roth conversions
• 07:15 – Why people convert to Roth: greed vs. fear
• 09:07 – Historical context for Roth conversion rules
• 11:52 – Accumulation (working) years: Should you convert?
• 15:40 – Retirement years: Shape of typical retiree tax rates
• 19:46 – Roth conversions as not a “need”, but a tactical benefit
• 22:19 – Who really benefits from Roth conversions
• 24:50 – Extreme example: Large IRA, high RMDs—are conversions “needed”?
• 28:34 – Return on Hassle, optimization as procrastination
• 32:42 – Fears about future tax hikes on retirees debunked
• 42:15 – How to think about conversion advice, incentives, and clickbait
• 49:39 – “Garbage Time Touchdowns”: Real-life RMD/retirement income example
• 57:32 – Roth conversion, estate planning, and heirs
• 64:26 – Where to find Cody & Sean’s work, conclusion

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Summing Up

Key Messages:

• Roth conversions can be beneficial, but are rarely a necessity for FI folks—especially in a system that continues to be favorable to retirees.
• Most retirees pay low effective tax rates due to high standard deductions, low RMD requirements, and control over how/when they generate income.
• The main beneficiaries of Roth conversions are people who are already winning the financial game (ultra-wealthy elderly, heirs).
• Beware universal advice, especially urgent or “all-or-nothing” takes—circumstances, goals, and tax law all matter.
• Focus on what you can control, avoid unnecessary fear or optimization, and remember: “The purpose of your retirement savings is to get you and your spouse to and through retirement.”

Final Thought from Brad:

“There’s no imperative…there are a range of options and your life is going to be different than mine. Don’t let fear guide you—or the influencer who says you ‘have to’ do something.”

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Find out more:

• Cody Garrett: measuretwicemoney.com, Measure Twice Money (YouTube)
• Sean Mullaney: fitaxguide.com, mullaneyfinancial.com
• Book: “Tax Planning to and Through Early Retirement” (available widely)

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(Summary prepared for ChooseFI Ep 581, focusing exclusively on content and actionable insights. All timestamps MM:SS reference the episode transcript.)

Transcript

[A]

Hello and welcome to Choose a Five. Today on the show we have Sean Malini and Cody Garrett, two of my all time favorite guests. And we're going to be talking all things Roth conversions. So a lot of this is thrown around. They're backdoor Roths, mega backdoor Roths, Roth conversion ladders, but what are they all? And as these guys told me, there's a lot of interest in taxable Roth conversions, but are they really necessary? And we're going to really try to talk through every aspect of this and you're going to leave here with a lot better understanding of all things Roth conversion. And with that, welcome to Choose Zephi. Before we get started, I keep this podcast entirely ad free for two reasons. First, this is a fi podcast and I don't want to promote products that I don't want you to buy in the first place. And second, I really like the clean listening experience of a show where you don't have to fast forward ads to keep it ad free. All I ask of you as a listener is the next time you open a travel rewards credit card, go to choosefi.com cards. And with that, onto the show, Cody and Sean. So I neglected to say you guys are the authors of the incredible book Tax Planning to and Through Early Retirement. And the book has been an immense success from what I've seen. Huge congrats, guys.

[B]

Thank you, Brad.

[C]

I appreciate that. Yeah, we've been excited. Like, it's funny, nobody writes a book to make money, you know, but we've been excited probably by the time this podcast comes out, about 8,000 copies, which, you know, I think about, like, if we were to stack those books, like, how high would they go? Like, it's just really exciting. It's less about the number of books quantitatively, but just thinking, what's the long term impact of just educating people about the fundamentals of tax planning?

[A]

Yeah, no, it's massive. And I mean, frankly, selling books is really, really difficult. Selling 8,000 books puts you in rarefied air. I mean, that's how hard it is to sell any kind of books. So huge congrats. I mean, this is not obviously like the murder mystery that's the summer hit, right? But then to sell this many books right off the bat, I think, and I, I believe since the first second I read it when you guys gave me an early copy, that this book is going to have legs for years and years and years. So again, thank you guys. And to anybody listening, if you haven't checked this book out, you can buy it on Amazon, a lot of libraries now I'm seeing Facebook posts in the choose of I group of oh wow. The book is now in my library. So they grabbed it and it. This is a book worth reading. So with that, guys, let's hop into this. I think you guys always come prepared and you gave me an amazing outline as usual. So I'm just going to throw it over to you, Sean, to start and we're going to pick up from there.

[B]

Yeah. So I think we want to focus on this episode, on taxable Roth conversions because there's a lot of debate, discussion, confusion, frankly. Oh, I know I need to do a taxable Roth conversion before year end or whatever it might be. So I want to distinguish taxable Roth conversions versus backdoor Roths because that too gets a lot of play. And maybe, you know, May June, we could do an episode on backdoor Roths. Backdoor Roths are great, but they're not really the focus of today's episode. So what I mean by that is a backdoor Roth is a transaction where you, you use the Roth conversion mechanism to get money into a Roth account. And the trade off there is very favorable. During our working years, we're high income. For whatever reason, we don't qualify to make a direct Roth contribution. So we do a backdoor. It could be the conventional backdoor Roth ira, it could be the so called mega backdoor Roth. That money, generally speaking, would have gone into a taxable account. So why not throw it into a Roth account instead through this backdoor mechanism? So instead of focusing on those backdoors where we think the trade off profile is generally very advantageous, we want to focus on these Roth conversions that are taxable. Right. So a mega backdoor Roth or a regular backdoor Roth, generally speaking, for the most part, not taxable, these taxable ones. The idea is we're going to pay tax or at least we're going to create taxable income. Right. There's no debate about that. That's, you know, the planning isn't to not create taxable income. So the idea is we're going to create taxable income through an elective transaction. Right. We don't have to do taxable Roth conversions, but we're allowed. And in fact, there's no income limits. There's no work. There's really no limits on this. Literally the only thing you have to have is a traditional retirement account in order to do a taxable Roth conversion. And the mechanism is pretty easy, depends a little bit on the financial institution. But essentially you go into Your traditional retirement account, usually a traditional IRA, but it could be a traditional 401k or traditional 403b or something like that. But generally speaking, the mechanism is pretty easy. You go into that account and you say convert, you know, a certain amount to my Roth. And what's usually going to happen is the platform is going to say alert, alert, alert. This is taxable income to you. Alert, alert, alert. And you're like, no, that's, that's the idea. I want it to be taxable. Say I accept or I'm okay with that or whatever the button is. And we're just moving this money from the traditional IRA, traditional 401k, to a Roth account and it's fully taxable in the year of the transaction. And we do that for planning purposes and we'll come back to whether that's advantageous or not. But that's what we're really talking about today, these taxable Roth conversions.

[A]

Yeah, that all makes sense. And I just wanted to clarify a few things. And Cody, you can jump in obviously at any point to clarify further. So a lot of people ask because they hear all these terms thrown about when it comes to these conversions or anything with the backdoor Roth, the mega backdoor Roth. And I think there's a massive distinction as you're making, Sean, between the backdoor and the mega backdoor and these taxable Roth conversions. And I say that specifically because I get this question. I've gotten this question for nine years on Choose a Buy, which is, hey, do you think I'm still going to be able to do this in the future? We've talked about Roth conversion ladders as a really essential part of a potential strategy down the road. And people are always concerned because they hear, oh, that might not still exist. And I want to get your guys opinion on this because the way that I look at it is the backdoor Roth and the mega backdoor Roth, those seem to be in some way skirting the intention of the rule. So there's, there's a contribution to a Roth IRA that has income limits and these are ways to essentially get around that. And now I'm not saying they're illegal or wrong in any way. The rules are the rules, whether we like them or not. But I think it goes against the clear intention of the income limits. Whereas a Roth conversion, as Sean just said, is something that you are saying, hey irs, hey government, please tax me on this amount that I'm converting from my pre tax vehicle, which would be a 401k or IRA. Etcetera into a Roth IRA. So you're every dollar of that, the fair market value, that amount that you converted just goes on your tax return as taxable income. So I see no reason why that will ever change. Because what kind of government anywhere would say no, I don't want a taxable event. So that's my take. I'd love your guys thoughts on that.

[C]

I think it's important to say that there are two primary reasons that people convert to Roth. Especially speaking about the taxable Roth conversions is that one is it's actually reminds me about investors that there's greed and fear kind of on two sides of the same coin. That one reason to convert to Roth is the greed. Well, I mean maybe a funny word to say, but the greed is that it's the excitement about the future tax free growth, that once this money's in a Roth it'll grow tax free, I can take it out tax free. It's a qualified future distribution. So there's the greed and excitement. So I actually found that a few years ago people were more excited about Roth conversions than Roth because of the excitement of tax free growth. And that greed or excitement about it is really popular now. The other side of the coin is showing its head or tails, which is fear, which is some people are excited about the tax free growth while others are doing Roth conversions because they're fearful about being crushed by taxes in the future, saying hey, well I'm going to pay my taxes now. Because I know not even necessarily subjective, but I've heard a lot of objective analysis and people just telling me, trying to convince me with a sense of urgency we'll talk about later, but there's a sense of hey, I'm going to pay taxes now. Not that I'm excited about the Roth, but more so I'm fearful that if I don't do it now, this is like my last opportunity and if I don't convert to Roth today, then I'm going to be crushed with taxes in the future. So I've heard a lot of commentators talk about this idea that hey, rates are historically low so I'm going to pay tax, not necessarily when I'll pay the least amount of tax, which is our construction, but they say I'm going to pay taxes when I know what the tax rates are. So specific commentators have said things like hey, I don't know if I'm actually making the right financial decision like quantitatively, but at least I'm making an intentional decision to control when I pay taxes rather than Having the government control when I pay taxes and how much in the future.

[B]

Brad, let me give you a little bit of history here and some comparison to a neighbor of the United States. So the backdoor Roth came into existence in 2010. It was based on a 2006 law change. Prior to that, you could only do a Roth conversion if your income for the year was less than $100,000. So a lot of folks couldn't do Roth conversions, but they basically said, Starting in 2010, we're going to lift this restriction. So everybody, it doesn't matter what your income is, zero or a billion or anything in between, doesn't matter. You just get to do a Roth conversion. And Brad, you alluded to it. I think they're going to be very hesitant to eliminate or to restrict Roth conversions. There was a proposal back in 2021, people forget this, that they said, well, you know, what we're going to do is in 10 years from today, we're going to stop the ability to do a Roth conversion, but only if your income is over 400,000 or 450 if you were married. And so it was, oh, yeah, we're going to do this in 10 years. And oh, by the way, it's going to be a rule that will apply to nobody because people at that high level of an income are going to not want to do Roth conversions. So it was the lamest thing ever. I don't mean to make a political statement, but it was like, oh yeah, we're going to get rid of Roth conversions. Well, no, you're not. You're going to say, if you're super wealthy in 10 years, you can't do one. Okay, the other thing about the backdoor Roth, so think about Canada. They have a tax free savings account. It's sort of their analog to the Roth ira. There's no income limit up in Canada for the ability to contribute to a tax free savings account. Essentially, the backdoor Roth IRA is a gimmick that gets around a bad rule. There shouldn't be an income limit on the ability to throw 7,500 into a Roth IRA, but there is. So this is a gimmick that gets around another bad rule. And then on the mega backdoor Roth, which frankly is one of these things that helps tech workers, it tends to be that tech workers have access to it because you have to have access to it through your workplace plan. Well, it turns out that mostly it's tech workers that have access. Not exclusively, of course, but whether you like it or not, there's an IRS and Treasury notice from 2014 that essentially blesses it. You know, we could debate all day whether that's a good thing or a bad thing, but it is what it is.

[A]

Yeah, no, that's fair. I love the clarification there. And yeah, we shall see. But I think, as far as I'm saying, and Sean, it seems like you agree, the taxable Roth conversions I can't imagine are going anywhere anytime soon. So that's, that's what we're going to spend the majority of this episode talking about. And I think this is a tactic that can be really useful potentially for people in our community.

[B]

So I think we now have to think about our two phases. We'll start with two phases, accumulation and drawdown or retirement. So you say, all right, these taxable Roth conversions, they're all over the personal finance commentary and advisors talk about them. How should I approach them? And I think a very easy way to start that approach is working years, retirement years, accumulation decumulation, however you want to phrase it or call it. One thing that's really interesting is if you have a job, that's usually a really good indicator. You should not be doing taxable Roth conversions. Yeah, that's the time to do a backdoor Roth, potentially, or a mega backdoor Roth. Fine. But if you got a job, why would you do a taxable Roth conversion? Because essentially, what Cody and I generally like to do is pay tax when we pay less tax. Well, when do you pay the most tax? Typically, it's when you're working. So if you're already paying a lot of tax and income tax, why are we going to add a taxable Roth conversion which stacks on top of our other income and is likely to face a very high tax bracket? Now, are there some exceptions to that? Yes. In the book, we refer to them as income disruption years. So it could be. Maybe you read Jillian Johns Ridd's book and you're convinced and so you're going to do a mini retirement and. And you don't work for most or all the year. Okay, that could be a time during the accumulation phase. Hey, I have hardly any income. Fine. I do a bit of a taxable Roth conversion. Maybe I'm going to grad school or law school or something like that. That could be a time to do a taxable Roth conversion, sort of during our accumulation years. But generally speaking, if you're getting a W2 in the mail at the beginning of the year, that's a pretty good indicator. Oh, yeah, maybe. You know, I can Think about it during retirement, but boy, during the accumulation years, the taxable Roth conversions. Because I've seen online some confusion about this, but that's like the first big indicator. Do I have a job? If the answer is yes, then most likely a taxable Roth conversion is very far off the table.

[A]

Yeah, that's a great back of the envelope. Just as a starting heuristic for this because yeah, the vast majority of people are going to be at least in the 22% marginal bracket. And that's somewhere where. Yeah, based on a lot of your guys analysis that I've seen or the discussions we've had in case studies, it really is going to be highly unlikely that that's going to make a ton of sense. So yeah, that's a great way to approach this, Sean.

[C]

And I'll add a brief personal example. So I was a professional musician for 10 years from age 20 to 30. Then I changed careers overnight to become a financial planner. And my first job paid, it was a W2 full time job, but it paid $40,000. And my wife had just become a stay at home spouse at that point, not earning money outside of the home. So as a married couple we had about $40,000 of W2 income as our only income source. So what I did during that time is through some full time work as a musician, I had put some money in a traditional 403B when I worked at a church. So you know, this is an example of a kind of income disruption. Right. We go from you know, both working full time to one spouse working full time and actually taking a big pay cut to become a financial planner initially. So that was one of those disruption years where I said, hey, like we've just drastically reduced our taxable income. Maybe this is the year to, you know, take some of those old traditional contributions and earnings and convert them to Roth. And at that point I was converting them to Roth within like the 10 and 12% brackets.

[A]

Okay. And that makes sense. And yeah, of course, as always, everyone listening to this, we're not giving financial advice to you specifically. We're talking about broad generalities of what might make sense. And this is how the three of us would mentally approach this. So yeah. Does that mean if you're making a W2 income and you have $5,000 of income, are you the prototypical example of what Sean's saying to avoid? No, of course not. But for the 99 plus percent of people it's a pretty good back of the envelope way to start this.

[B]

So from there we've Got to go to taxable Roth conversions during retirement. And you can't just approach this in a vacuum. You have to say, well, what am I doing by doing a taxable Roth conversion in retirement? And who am I helping? And the first insight to tackle here is that taxation in retirement tends to be light. And I know that's a counter message to what you hear in other places, but I've done this on my YouTube channel. We did this in the book. What we keep finding is we have folks who have traditional retirement accounts and Social Security and maybe even some taxable brokerage accounts and, and even very successful, very affluent folks in retirement. And time after time, when we run the numbers, we find that retirees tend to be lightly taxed. So that raises an issue. If I'm worried about taxes in retirement, I might do more in the way of Roth conversions. But why am I worried about taxes in retirement? What tends to happen? Mike Piper made this point in a 2024 speech. We can send you the link for the show notes. It's really good talk. It's from the Bogleheads conference. And he essentially said, look, the two main tax benefits of a Roth conversion are going to be reduction of the taxes on taxable brokerage accounts. Essentially what you do is you do a Roth conversion, you trip some income taxes and you pay for it with those taxable brokerage accounts. So they now can't trigger, you know, taxable income to you. They're not generating dividends. So that's the first benefit. And then the second benefit is a Roth conversion reduces the negative tax effects of RMDs. So that's very insightful. And then Mike in that same speech later says, Roth conversions do not improve, generally speaking, financial security in retirement. And he acknowledged to the audience, how can that be? Can we hear all these great things? And part of what our book does is it says, well, wait a minute. The tax drag on those taxable accounts in a low yield world with qualified dividend rates tends to be very small. So it's like, okay, the Roth conversion helps against tax drag, but that tax drag in this environment tends to be very small. Then, well, what about RMDs, right? Aren't they terrible? Well, maybe not so much. In fact, at this year's Bogleheads conference, Jim Dolly said something provocative that I sort of generally agree with. Not entirely. He said, biggest misperception of personal finance is that RMDs are bad. It's like, whoa, Jim, okay, slow your roll. No, but actually, generally speaking, I think the White Coat investor Dr. Jim Dali Pretty much got it right. I'm not a big fan of getting raises later in life. That's the one drawback to my mind of RMDs. I'd rather spend more earlier rather than later. Different conversation. But essentially when you look at the RMD tax environment, it too is not all that bad. So those are big parts of the reasons why generally speaking, Roth conversions aren't needed. They can be beneficial. We could talk about some examples a little later on where. Absolutely. You see a benefit to doing the Roth conversion. But even in those examples, you're not going to really see a need to do the Roth conversion.

[A]

Yeah. And I suspect this is something we're going to get into. This is something Cody asked me about before we hit record, which is in retirement, what income is going to fill up the standard deduction and maybe your, your lower income tax brackets. And I think for a lot of people we've talked for years, going way back to, I think episode 17R way back in 2017 about the Roth IRA conversion ladder, just as a really elegant way of potentially getting all of your money out of pre tax vehicles like a 401k or traditional IRA into a Roth while laddering this over many years and potentially paying essentially zero tax on all of that money. So that was just an interesting construct, but that's not the only way to fill up those brackets. And Cody, I'm curious as we go through this to talk more about that.

[C]

Yeah, I think that there's this big assumption that's happening where, especially within our community, the Choose A five and just overall financial independence community, that somehow we're going to have more income in retirement than we did while working. And I would love for us to step back and ask the question, right? So you know, if you stopped working, you know, in retirement, maybe especially early retirement, where do you think your sources of taxable income are going to come from? Most likely you're not going to have access to Social Security. You might even delay all the way till 70 for Social Security, which is another potential tactic assuming you have sufficiency. But I know just a small poll and definitely not representative of the American world out there, but I would say that doing a small poll on even the Choose A5 Facebook group asking, hey, how many of you expect to receive a private or public pension besides Social Security and retirement? And it was about 2/3 said no. And I think that this isn't something. We just think this has been happening what they call the transition from what was called a defined benefit to Plan to define contribution plans. This started in the 70s and has expanded out. And now a lot of you listening might even have a pension from an old employer, but now that it's been shifted from a pension plan to a 401k or 403b, something like that. So one big misconception just to question yourself on is will I really have more, more sources of retirement income than I did while working? And the second is the quote that we see often in the comments and the post is I know I need to convert to Roth, right? So there's this belief that it's a need, a necessity, rather than something that can be beneficial. So I will say a lot of people like have told me, hey, like you're anti Roth and things like that. I know first it's Roth at the right time, it's kind of a fun phrase. But the second is that I'm not against Roth conversions. I'm just against thinking that they're a necessity to be financially successful in retirement. So they're not a need, they're a benefit potentially. And by the way, with serving clients as a financial planner, not accepting new clients, so not a way to market my practice here, but I'll just say working with financial planning clients. I would say that most of the retirees I work with are doing Roth conversions, but what I mean by that is they're using them strategically, tactically, usually not very aggressively. Pretty conservative Roth conversions, especially in early retirement, sometimes actually increasing their taxable income to increase their premium tax credits, for example, for the ACA health insurance. So even speaking briefly with Sean here, that we are not anti Roth conversion, they need to be very intentionally thought through without making a lot of assumptions about the future of tax rates, more focused on your sources of taxable income now into the future.

[B]

And I think it's also helpful to think about who are the primary beneficiaries of Roth conversions. And I've sort of boiled it down to two. One of them, if we're born in 1960 or later, is our 75 and older selves, okay? Because what the Roth conversion essentially is going to do when we do it before our RMD years is it's going to reduce our future RMDs. But let's think about that 75 or older person. If that 75 or older person could be in a position to have a high tax rate on an rmd, they're already financially successful, right? They're already pretty much, you know, most Americans would call that person very rich. That's a very financially successful person. So in our 40s, 50s, 60s, we've done tax planning and incurred a lot of tax on a large Roth conversion to benefit somebody in their 70s or 80s who probably can't even spend the money anyway because they don't have the energy to do so and is already financially successful. So it's interesting to me that the primary beneficiary of a Roth conversion is a very financially successful elderly person who has no particular financial need for the money and in fact, may not have the energy to spend it. So that's one beneficiary. Who's the other beneficiary of a Roth conversion? It's our loved ones, our heirs. Right. So they're going to inherit a Roth instead of a traditional, and that is, they get a benefit. All right, but let's think about that person for a second. That's a person who just had a financial windfall. So we've done tax planning for people who have financial windfalls. Not that that's nothing, but one, we've done tax planning for somebody who's not us or our spouse. And we have to step back and say, what's the primary job of our retirement account? It's not to do tax planning for other people. It's to get us and our spouse to and through retirement with financial success. But two, that's a person who's not only not us, but that's a person who's had a financial windfall and. And now you're giving them a tax break as well. Not that that's. Look, I'm not here to say that's not a legitimate objective, but I don't find that all that compelling. Objective. I'd rather focus on, you know, the person and potentially the person and their spouse and getting them to and through retirement with financial success.

[A]

Yeah, No, I love that analysis, Sean. And yeah, there's. There's so much here I wanted to clarify real quick. You said something that Roth conversions reduce future RMDs, and I suspect a lot of people are not going to know that offhand, but they're not required minimum distributions from Roth IRAs and Roth 4, correct?

[B]

That's exactly right, Brett. And. All right, here's a good way to look at it. Let's look at it from the perspective of a person who screams out for some large Roth conversions. This is a pretty rare person, but he or she does exist. 60 year old, and they're single at 60 years old. Okay. And they have a $5 million traditional Iraq. Okay. So when we look at Them if we look into the future, what we do is in the Future starting at 75, they would have RMDs. And how do you compute the required minimum distribution? The rmd. You take the then current year end coming into the year balance on the retirement account and you divide it by the factor on the IRS table. The first factor for age 75 is 24.6. So the RMD starts at about 4.07%. It'll go to close to 5% by age 80, it'll be 6.25% by age 85 and it goes up as we get older. If we do some basic projection of that 60 year old single person, $5 million IRA, we could find that, yeah, they're going to have RMDs that are going to be subject to the 32% bracket. So that's a person who would, generally speaking, benefit keyword benefit from. From doing a Roth conversion through the 24% bracket.

[A]

Okay.

[B]

And I think most financial planners will sign off on that. I'm not speaking for all financial planners. I'm not giving you advice in the audience, but academically that makes sense. But what have we just done? We have just achieved an 8 cents on the dollar benefit. That's a benefit. What if that 60 year old ignores our advice and says, oh, I'm not going to do these Roth conversions, I don't want to pay the irs. Well, okay, are they going to be in a position when they get to 75 and they start taking RMDs and some of them are going to be taxed at 32%? Are they going to have well over 200,000 of after tax cash flow measured in 20, $26? Yes, they are going to be fine. They didn't need to do the Roth conversion. Yes, if they had done the Roth conversions in their 60s, they would have reduced that traditional IRA balance, which would have reduced the RMD, which most likely would have reduced RMDs that would have been otherwise subject to the 32% tax. By the way, that single is still going to have probably some RMDs, maybe in the 12% bracket, certainly in the 22 and 24% bracket. So they're not going to get crushed. But yes, they absolutely have an inefficiency if they don't do the beneficial keyword Roth conversion. But even for that person, who is rare, even for that person, I wouldn't call Roth conversion a necessity.

[C]

And I'll also mention that if an rmd of about 4% of a traditional retirement account is More money than the retiree needed to live. What does that tell us about not just their current situation, but also their previous situation? What I find is those who are most concerned about the need to do Roth conversions not only are financially successful, but they're actually over saved and overworked. You know, again, I'm a big proponent of, you know, financially independent recreational employment. Like even when I'm financially independent, I'll probably still work, I'll probably still save and invest. But I do need to note that if I'm worried about RMDs in the future, it's probably because I actually over saved and invested for my retirement. So those who are concerned about the future RMDs way exceeding being multiples of what they actually spend in retirement, they either over saved, over invested, overworked on the path to retirement, or, or they're underspending and under giving in retirement. So just, you know, not that any of these things are bad, no shame or judgment, but I do think that if we're concerned about Roth conversions, that means that we're financially successful and that maybe we're actually like even more successful than we initially thought we would be.

[B]

Cody, can I just throw in something on that? So my 60 year old with his or her $5 million IRA, they're single, they can do beneficial Roth conversions say through the 24% bracket. But he or she might want to step back and say, well wait a minute, the 24 cents on the dollar I'm going to give to the IRS this year to avoid giving 32 cents on the dollar to the IRS in 15 or more years, maybe that's better spent today visiting friends and family, giving to charities, you know, doing some living while there's some living to be done. Right? So like I have this little saying, nobody goes to the tropics for the first time in their 80s. Now look, you don't have to manage to go to the tropics. But my point is maybe it's better off to do more modest Roth conversions in our 60s and take what we would have spent on taxes essentially in our 60s on a Roth conversion and do some living while there's some living to be done. Maybe that's travel, maybe that's visiting friends and family, maybe that's helping family, maybe that's charity. You got to do you. But I think this idea that we're going to spend a lot on taxes and potentially sacrifice benefits in our own lived experience in our 60s so that our 70s and 80s year old self has slightly better tax outcomes May not be the best idea.

[A]

Yeah, Sean, this reminds me of like, you know, put on your oxygen mask before helping others. Also going back to what you were saying about how one of the main potential benefits for people as a use case is you're essentially prepaying the tax for your heirs who are going to get this windfall. So I like this line of reasoning and I wanted to kind of take a holistic step back and just say like that's what we're talking about here. These are all just potential strategies. Of course we don't know exactly what your situation looks like, but if you're talking about you've already filled up the standard deduction and you're actually, you're making a decision to make this conversion and actually pay tax in the current year, well, I think these guys are trying to present to you that, all right, maybe it doesn't make so much sense. And Cody, this goes back to what you said maybe five minutes ago, just about generally, like there are all of these things that people say, right, that like, generally accepted that like one for instance, even though we're talking about Roth IRAs, but like one is Roth IRAs are always better than traditional. Roth is always better than traditional. I'm like, I think all three of us would say, I don't think that's exactly true. That doesn't mean there aren't instances where Roth or better. But this crazy blind devotion to Roth doesn't look at facts of the situation. I think another one you also talked about is your income is going to be much higher in retirement and therefore your tax levels are going to be higher. Like what? I struggle to think of an example where that would be true. And the beautiful part is I'm sure there are examples clearly, but to a large degree we control a lot of this aspect of what our taxable income is going to be in retirement. And that's one of the beautiful parts about the path to FI is I've always used the phrase control what you can control. And I think that's why I like getting tax deductions in my current years. So I like putting money in broad terms. Again, I'm not blind about this, but in very broad terms, if I can put into a pre tax vehicle and get a tax deduction now, well, I know what my tax rate is now. I know what my marginal rate is. A lot of this is fear mongering and prognosticating on something we can't possibly know which are tax rates are going to go up. Right? Like you hear that over and over and over again you guys have alluded to it. Like, do you know that definitively? Does anyone who's saying that know that definitively? Of course not. You could guess anything you want, but just. It's the same as guessing. Is the stock market going to go up six months from now or is it going to go down? You could come up with any kind of compelling case, talk to 100 experts, you're going to hear 100 different opinions. Give me a break. Is ultimately what it boils down to. We, we do not know. So that's why I think you use the sense that you have and control what you can control based on what you're seeing on the ground today.

[C]

And I think we should ask. I mean, I love the optimization, you know, like, I'm all about it, I'm all about the spreadsheets. But I do think we should be more intentional about understanding. You know, we have even a chapter in the book, we call it Return on Hassle. There's this idea that we often think about opportunity costs as financial, purely quantitative. But I do want to step back and consider, you know, if you're listening and you've been thinking about Roth conversions, kind of think about the time and energy spent thinking about them. You're not just on the path to the Roth conversion, but even afterward, you know, there's a regret avoidance and a lot of, there's, there's a lot of therapeutic things that come into play. Also, I find that sometimes when there's a lot of focus on something like a tactic of a Roth conversion or tax gain harvesting, sometimes it goes beyond the optimization as really a form of procrastination. One thing I'm finding a lot is people, especially moving into retirement, like newly into retirement, they've just flipped that switch from saving and investing and accumulating right now to like spending and giving and distribution and drawdown. There's already so much fear and anxiety. You know, that anxiety I call the fear of future uncertainty when flipping that switch into retirement. I find that a lot of people, especially within our community, our way of dealing with stress and anxiety is actually going deeper into the spreadsheet. Adding a few more sheets to our spreadsheet of our analysis. And I will say that optimization can actually be a form of procrastination. And the way I kind of phrase this is procrastination is you're avoiding pain and you're pushing it into the future. Right? And I think that just stepping, I know that we kind of step back qualitatively sometimes and just say that, yeah, Roth conversions, like, yes, do the math, but just don't let yourself spend so much time and energy stressed about something that primarily out of your control.

[B]

And I'll just add that we have to think about predictions about the future, and there have been plenty of them, and I think it's revelatory to see just how successful or not they've been. So we've heard for years now, taxes are going up on retirees. Taxes are going up on retirees. Taxes are going up on retirees. There's only one problem with those predictions, and it's that they keep being exactly wrong.

[C]

Right.

[B]

And at some point we have to say, well, those who are predicting taxes are going up on retirees in the future, maybe we shouldn't be listening to them when they keep getting it wrong. So what I mean by that is the future keeps happening and Congress, whether it's Democrats or Republicans, they keep cutting taxes on retirees. I'm not here to say that's a good idea or a bad idea, but I'm here to say, well, when we actually play the game, the game keeps having tax cut after tax cut after tax cut for retirees. I'm not here to say they're just going to keep doing that, but I think that's revelatory that despite the very high national debt and deficits, they keep cutting, not increasing taxes on retirees. They've cut taxes so much so in the last decade or so on retirees, we had to distill it into a table. We call it the Litany of Tax Cuts for Retirees because we couldn't go into chapter and verse on it or would have, you know, made the book too boring for the reader. So, you know, I'm not here to say that retirees are never going to have a tax hike, but, boy, it's interesting that they keep cutting taxes on retirees, but commentators keep saying they're going to increase taxes on retirees. That doesn't add up, in my opinion.

[A]

So one thing I did want to ask was, why does everyone push retirement Roth conversions? And now, to be clear, I have talked about the Roth IRA conversion ladder as a strategy for years, but I don't think by any stretch would I say I've been pushing this. I think it's a really fun potential strategy. But there are a lot of people in the general finance world that really push these things, like Yuka said. And really the whole cause for this episode is this is not something you have to do. But yet people have that sense. And it seems as if there are personalities that are pushing that.

[B]

Yeah, Brad, I think you have to step back and you have to say, what is the master of reason? And oftentimes the master of reason is motivation. Your motivation tends to drive your reason more than you would like to think. So we have to step back and say, well, what's our motivation? And for some commentators, for some advisors, the motivation is relevance. Okay? So you don't get a lot of relevance by saying, hey, you know, there's this tactic out there and it might be beneficial for you, but it's no big deal. And if you don't do it, you're still going to probably be okay. Right? So you get relevance. And that's what motivates you by pushing things and saying, hey, this is a necessary thing. This is a very important thing. And so you have to ask, what are the people's incentives and what's. What might be driving their reasoning? And it might be their motivation and what's their motivation? So that's one thing. The other thing, frankly, is we've had outdated thinking in this space. So Even last year, 2024, you could very reasonably argue, well, you should be doing a lot more in the way of large Roth conversions because taxes are going up. And that was nominally true. You looked at the Internal Revenue Code, the tax cuts from 2017, the higher standard deduction from 2017, that was all scheduled to go away. Well, it didn't go away. In fact, they increased the standard deduction a little bit. Okay, fine. But my point is, I think in this space there's a lot of outdated thinking. Folks have not come to terms with the fact that the standard deduction is now permanently higher. The brackets went down, and they've made some other changes. Right. Used to be RMD started at age 70 and a half. Now they start at age 75. They increase life expectancies on that RMD table, so that lowers RMDs. I do think for whatever reason, a lot of folks just haven't updated their thinking in this space.

[C]

And to add to that, I think there's a lot of excitement about. I mentioned that financial advisors, they're typically expected to do things. It's kind of ironic that sometimes they'll talk with somebody about their relationship with their advisor. And even around the holiday dinner, it's just like, hey, like, what did your financial advisor do for you? You know, whether it's like returns or like, you know, like buttons to click. I think in the advisor world there's this idea that for financial advisors, on average, to kind of prove their value, they have to show that they've been actively doing something. And if they're not actively trading, which we know typically results in, you know, reduced performance, a lot of advisors talk about these value adds, like, what can I do? Like, what can I do to show clients that I'm working for them and, you know, I'm worth the cost? So I do think a Roth conversion, again, us saying that a Roth conversion might not make sense, like, it doesn't sound very exciting. There's the idea of, you know, hurry up and do nothing. Right? There's this excitement about all this optimization, the Roth conversions, tax gain, harvesting, Even in choose a 5, we have to be careful, right? And a lot of these tactics are really exciting. But I know, Brad, you constantly remind people, just because this exists doesn't mean it applies to your situation. So I think we like to kind of collect this bag of tricks. A few years ago it was, you know, the I bonds were real, real hot. People were talking about tips ladders this last year or so. Again, now it's kind of like it's the time of the Roth conversions. Like every year has its theme where everybody. There's a fear of missing out, whether it's on a specific investment or investment strategy. So I think right now the strategy that's real hot is Roth conversions. And kind of ironically, there's actually kind of a debate. If you look at the thumbnails on roth conversions on YouTube, one thumbnail will say, convert it all now before it's too late. And the next thumbnail will say, don't convert anything. So unfortunately, there's kind of a binary take of like all or nothing thinking within personal finance. So I think bringing more of a balanced approach doesn't really get as many clicks.

[B]

Yeah. And I'll just add, you know, one. In our book, we literally have a concept called the tailored taxable Roth conversion, which is a modest Roth conversion that could potentially be federal income tax free. So we're not against Roth conversions, where we tend to ask a lot of questions, be a lot more skeptical, is for the large scale Roth conversions. And I also just want to add, you know, around this concept of maybe potentially some outdated thinking out there. If we look at 20, 26 and we look at the married filing joint tax bracket, we can get with the standard deduction and assume we're under age 65. For this, we can have up to $133,000 of income. And not a penny of that income will be subject to the 22% bracket or more.

[C]

Right.

[B]

All that income is going to be subject to the 0% because of the high standard deduction. 10% or 12% bracket. That's screaming big picture. Spread out income. Spread out income. Spread out income. Do what you can to spread out income over your lifetime because you have these, you know, the 10% and 12% bracket, you have the high standard deduction. So then you apply that to a large Roth conversion. And what's a large Roth conversion doing but concentrating income into a single year? So if the planning environment tells us, hey, spread out income, spread out income, isn't that a sign to us that maybe a large Roth conversion may not be a good idea in most cases. I'm not saying every case 100%, but I'm saying the vast, vast, vast majority of times we want to spread out income as much as possible. And one of the ways to do that is maybe, you know, question those larger Roth conversions and maybe instead do large, more modest Roth conversions. And just understand back to the fundamental concept. Even the modest Roth conversion is most likely to be a beneficial tactic, not a necessary tactic.

[C]

Right.

[A]

Yeah, I love that. And I'm glad you slowed down, actually, on that, the 2026, because I'd love to have us just spitball this. And I know we didn't prepare for this ahead of time, but I think this would be an interesting way to sum up this episode. Because while we've talked about Roth conversions not being absolutely necessary, they are an option. Right. And we're not, as you guys have both said repeatedly, we're not saying to not do Roth conversions. We're saying situationally, they can be great. But it's the drumbeat of you have to. Anytime you hear a drumbeat of you have to for anything, you really, really need to take a step back and ask, as these guys said, what's the incentive? What's the motivation of why this person is saying it? Do I believe this? Does anything in my experience lead me to believe that this thing is an absolute necessity? And this is not to say, like you guys mentioned, Cody, the I bonds, Right. Like, that's not to say X number of years ago. I don't even remember four years ago that I bonds were a bad suggestion. They might have been perfectly fine then. I remember I even bought whatever the limit was. It was, you know, $10,000 or something.

[C]

Your 9% for a few months.

[B]

Yeah.

[A]

And it was great, you know, but does that mean that I close my brain and I just kept putting money into ibans, thinking it's the greatest thing since sliced bread. No, of course not. Life changes. This is how the world works. Things constantly change, and we need to update our thinking. Okay, guys, but I think what would be really helpful and illustrative is just to kind of talk through. All right? We know people have fears, right? We've talked about this episode. People fear higher taxation in retirement for some reason. I don't know why, but Sean just said, okay, in 2026, let's say this was retirement year for you and you were married, filing joint, you could have $133,000 of income. That's the actual income. And then you take out the standard deduction, and the remainder is taxed in either the 0% tax bracket, the 10% tax bracket, or the 12% tax bracket. Guys, I haven't done the math, but I assume on that 133, the effective tax rate is probably somewhere, if I had to guess, 5 to 8% somewhere, plus or minus seems fairly standard. Which. A 5 to 8% effective tax rate on $133,000 of income is astonishing, right? I mean, how many of us need $133,000 of income to live off of in our 5 lives? I can't imagine there are that many of us. So just the back of the envelope just proves, like, I don't think you need to fear the high taxation like most people are fearing it. So anyway, that is a very long way of saying, let's talk through what can make up for people in early retirement. You guys see clients, et cetera. Like, what makes up this income? Because I think a lot of people just don't even have a sense. Like capital gains distributions, dividends are obvious ones that like interest income, things that by virtue of having a significant net worth, you're going to have a baseline quote, unquote income. But those are just three right off the top of my head. But I'd love for you guys, the actual experts, to talk through, how should people think about this? Because again, I think a lot of people are thinking, oh, I don't have any W2 income. My actual income is zero. So I get to fill up the entire standard deduction with Roth conversions. And I laugh all the way to the bank, right? Like, not a bad strategy if that were the case. But let's throw it over to you guys to talk through just sort of real high level, how someone should think about what is my income actually going to look like.

[B]

Yeah. And Brett, now we're getting into drawdown tactics and strategies, even just separate from the Roth conversion. And I think it's beneficial to start with for many in the FI community, you get to an early retirement. What's the first spend? Assets. It's the brokerage accounts, right? It's a taxable accounts. And your, you don't have to take RMDs. So your income is going to be maybe a little bank account.

[A]

Right.

[B]

So a little interest income. But we're in a 4% yield world, so maybe that's 2,000 bucks interest income. Okay. That doesn't eat through the standard deduction or barely does. And then you have this brokerage account and it spits out dividends. But what do we live in? We live in a low yield world. Domestic equities. My goodness. As we record this In December of 2025, a well diversified domestic equity index fund is yielding something like 1.2%. So $1 million will kick out about $12,000 of taxable income. Oh, by the way, 90 plus percent of that is going to be so called qualified dividend income. So even if you have $1 million of a taxable brokerage account going into retirement plus a small bank account, your initial taxable income is about $14,000. Single, married, you're not going to pay any taxes on that. Now you'll probably then sell some of those brokerage accounts, you know, trip capital gains income, which is very favored. And now, yeah, maybe you trip 50,000, 60,000, 100,000 of capital gains income. But even that might be taxed at 0% or maybe a little bit of that. Some of that might be taxed at 15%. So you just saw a very affluent either single or married person would pay, you know, maybe zero federal income tax or maybe they'd pay a little bit on the capital gains, but that's 15% of a little piece. And then what happens is. So you asked about sources of income. Well then let's fast forward it to later in life when we've spent down those brokerage accounts. Okay, so we spend on the brokerage accounts. They're pretty much gone. And now we're taking Social Security and we have the so called requirement distribution out of the traditional ira. Well, okay, let's do our tax return interest income from our. We still have a bank account. Fine. So we get a little interest income. Let's call that $2,000. We, we get our Social Security, that's generally going to be 85% taxable. For some people it'll be less than 85%, but let's just call it 85% for our more affluent listeners. And then we have our RMD from our retirement account. You know, okay, that could be a big number. I did an example recently. It's on my YouTube channel. But you know, I also separately have the spreadsheet where I posit a 81 year old widow in the dreaded. They call it the widow's tax trap. Everybody worries about this. Oh, no. You know, we're married, so we don't pay a lot of taxes because married filing joint. But then one of us dies and now we're in the terrible, the dreaded widow's tax trap. Okay, so I posit this widow, she's 81 years old, so her RMD is just a smidge over 5%. And I posit her with a $3.68 million traditional Iraq. Most financial planners are going to tell you that is the worst, the worst, the worst possible outcome. Well, I run through her numbers and I even say she still has a bit of a taxable brokerage account because she and her husband took RMDs that were in excess of their needs. So what I find is, okay, so she's doing the rmd as an 81 year old and she's got this horrible, terrible, awful $3.68 million traditional IRA, by the way, a position most Americans good problem to be. Yes. But what I find is that she takes $189,700 RMD, which is an RMD level most Americans will never sneeze near. But let's go with it. All right, so she has this almost $200,000 RMD. Her total income for the year is almost 250,000 with Social Security, with some dividends, a little interest income. That's her tax return.

[A]

Right.

[B]

It's not all that complicated. And on that, she pays 45, 46,000 federal income tax. And you know, there's a little bit of, they call it net investment income tax. Two years later she'll have this Medicare surcharge at $6,500 to her when she's worth more than $4 million. No big deal. And what I find is. So her effective rate, even if we include the IRMAA as a wildly financially successful widow, is about 21.3%. And that includes that IRMAA surcharge. And that's two years down the road. But let's just include it because it is an effect of today's taxes. But what I find is the first thing is her after tax cash flow, you know, in 2026. So not including the IRMAA, but otherwise it's $201,000. So in the widow's tax trap, paying 32% on some of the RMD, she does have after tax, $201,000. She's doing fine. Her RMD, that 189,700, almost 15% of it, is subject to the 12% tax. So in the widow's tax trap, she still has an RMD that goes off a bit at 12%. A bunch of that RMD is going to be taxed by the 22% bracket. And about half the RMD, almost 51% is taxed in the 24% bracket. Of that 189,700 RMD, a little bit more than 10,000 is taxed in the 32% bracket, about 5 to 6% of the RMD. Plus by my, you know, quick and dirty numbers here. And Brad, I could share this spreadsheet with you. We could post it. I'm fine with folks looking at it, but my point is that in this dreaded widow's tax trip, right, this horrible, horrible widow's tax trap, that people, people fear taxes in retirement because they're going to be so high. Well, okay, let's posit a widow. Let's posit that she has almost 4 million in a traditional IRA. Her RMD, most of it is taxed at 24% or less. Six percent of it, let's round up, is taxed in the 32% bracket. And oh, by the way, her after tax cash flow is $200,000. She's doing fine. So yes, the IRS gets the win on irmaa. It's not technically the irs. Let's call it the federal government. You know, the IRS essentially gets a win. You know, she probably could have done some more Roth conversions, had less irmaa, but let's call it a win on irmaa and let's call it a win for the IRS on that rmd hitting the 32% bracket. Those are what I refer to as garbage time touchdowns. And Brad, I will say this. I don't like the term expert. I really don't like that term. I never use it. But I'm going to make an exception. If there's one thing Sean Molini's an expert at, it's garbage time touchdowns. Why? Because I've spent more than a third of a century rooting for the New York Jets. And as a Jets fan, if you know something, you know about garbage time touchdowns, the offense scores a touchdown where it puts points on the board but has no impact on the ultimate winner or loser of the game. That's what we're, you know, this widow, probably she and her husband should have done some Roth conversions and maybe they would have been taxed at 22 or 24%. Well, okay, they didn't do those Roth conversions. And what happens? The IRS scores some garbage time touchdowns. She pays a higher tax when she can easily afford to pay the higher tax. And let's think about the tax planning arc of this widow who has this $3.68 million traditional IRA. For a second, this widow, she and her husband deduct into a 401, call it 24% saved. So they're winning against the IRS at work, but we know that that's fine. Then they get to retirement and maybe they spend down some taxable accounts first, and they're paying hardly anything in federal income tax and they might even be doing some small Roth conversions. I say they don't here, let's just say they don't.

[C]

But.

[B]

So they went against the IRS in the working years. They then went against the IRS to spend down the taxable brokerage accounts. They might be paying zero federal income tax for a few years, spending those things down. Then they're married and they start having RMDs. The RMDs are mostly going to be taxed in the 12 and 22% bracket while they're still both alive. They're married. So the arc of their tax planning life is win against the IRS while working, win against the IRS in the early part of retirement, win against the IRS when they start taking the RMDs as a married couple. And only in the late fourth quarter when I call her Jane, she's 81 years old. She's a widow. Only in the late fourth quarter does Jane start giving up some garbage time touchdowns to the irs. The IRS starts winning, by the way, even in that phase, 14 or 15% of the RMD might go against the 12% bracket in my numbers. So, you know, even then they might still have some W's against the IRS. But yeah, paying 32% on, you know, on some of the RMDs is A, is a loss, but it's a garbage time touchdown that the IRS wins. But that doesn't change the fundamental tax planning arc of her life. It's win against the IRS after, win against the IRS after, win against the IRS after. And then late in the fourth quarter, a few garbage time touchdowns to the irs. But she's still doing great.

[A]

Sean, I love, I love the garbage time touchdown. So A little fun fact for the audience is we grew up about 10 minutes apart on Long island and our high schools were actually 1.6 miles apart. We didn't know each other.

[B]

That's right. That's right.

[A]

Really 1.6 miles. And we're both long suffering jets fans, you much more than me and New York Mets fans. So, yeah, we're used to, we're used to some, some pain, needless to say. But yeah, I love this as a worst case scenario. So again, there's so much fear and yet when you come up with examples, it's hard to do worse than this. And we say that kind of dripping with sarcasm because as we said, this woman is doing wonderfully in your example, she has millions and millions and millions of dollars. There's no world. She paid a 20% effective tax rate, which for everybody out there, effective tax rate is just tax liability divided by the gross income that we're talking about here. So in this instance, if she had $250,000 of gross income, 20% of that would be 50,000. So if she had a 50,000 tax liability, the effective tax rate would be 20% on this $250,000 of gross income. It's really important in our graduated income tax system that you understand that there are tax brackets. But that is the first X number of dollars, depending on your filing status are at 0%. Then the, the next Y number of dollars are at 10%. The next Z number of dollars are at 12%. That's how it works. But the smartest way to look at it is, oh, your overall tax burden is your effective tax liability. So that's why we refer to that. But it's important that you understand the definition. So, yeah, Cody, I know you wanted to jump in, but I wanted to just touch on that in that this is the worst case scenario and it's still fantastic, right? Like we're talking, as Sean said, about garbage time, touchdowns. And for most of us, our effective tax rates in retirement, in early retirement or other retirement, traditional retirement, are going to be well less than 10% because we control most of this. And that's the beautiful thing, like as Sean said, you get to play with your taxable brokerage at first and a lot of that is long term cap gains. And Cody, you've talked eloquently on the podcast before about how there's a significant huge percentage we get showered with benefits on long term cap gains up to, I don't know what the exact number is in 2026, but it's something like probably 98 or $100,000 are taxed at 0%. Like, this is crazy. That's the gain. That's not the amount of money you pulled out, Right? It's the actual gain. So for most people, you can play around with this and your effective tax liability is going to be almost zero or under 5%, under 8% in retirement. Like, there is nothing to worry about at all.

[C]

Well, my one fun pushback for Sean is you're going to have listeners of this podcast yelling at their podcast player saying, but, Sean, I want to be able to control taxes. Not just during my lifetime, but I want to control those taxes from the grave. So I want to mention this idea that if she passed away after this scenario, her heirs, by the way, her heirs could also include charitable organizations that pay $0 in tax on that money inherited. If they inherited 3.7 million, a lot of the concern within our community is, but aren't those kids? You know, maybe her adult kids might be even in their highest earning years, they just inherited 3.7 million. They're going to have to pay a ton of taxes on that. And from hearing on both sides, we talk about the regrets of the dying a lot, right? Of saying, oh, I wish I would have had more experiences and had more memories with the people I love while I was alive. Guess what the regret of the heir is. First off, they inherit $3.7 million from mom or grandmother. They're like, wow, that's amazing. Like, that is life changing money. By the way, even 3.7 million hit with taxes after tax. That's still an incredible inheritance. But I'll also mention that the error is most likely, yes, maybe they're paying a little bit of taxes on that money. But the most common story I hear when somebody inherits a large amount of money is, I wish my mom would have been able to spend this money while she was alive. And I wish we could have spent that money to enhance our experiences together. You know, staying right on the beach rather than a few blocks from the beach. You know, my grandma never got to go to Norway, by the way. True story. My grandmother, her whole life, she talked about how much she wanted to go to Norway. Never went. So when we inherit a million dollars from grandmother, right? Our initial thought isn't, oh, I have to pay taxes on this money. It's, oh, man, I wish my grandma would have been able to spend this money to go to Norway when her physical and mental health was in a good place. So I know I kind of push back on Sean that if somebody told you, but what about the kids paying taxes? What's your response, Sean?

[B]

So a few things. First of all, we have to ask a fundamental question. What is the job of any retirement account, traditional, taxable, Roth or any retirement account? I argue the job of a retirement account is to get me and my spouse to and through retirement, period, full stop. It is not to manage the tax liability of someone else. So that's the first thing I will say to that. In this case, this widow's doing fine. Her and her husband, presumably while he was still alive, were doing fine with 3.68 million at 81 years old. So the retirement account did its job. Second thing is, okay, so you're worried about the taxes of a person who just had a windfall. All right, so that is, that's not the most compelling financial planning concern, particularly when we're doing our own financial planning. Third, are you sure your heir or heirs are going to pay a lot of tax on this? So this can happen in different ways. One, maybe you only have one heir, but they inherit the $3,700,000 IRA and now they're like, they're going to do an early retirement. So they're going to primarily spend this down over the 10 years and they're going to use their own early retirement to reduce the taxes on it. So that's a possibility. And then lastly, I'll just give you an option. You know, if you got a $3.7 million IRA and you're worried about your heirs paying taxes on it. Well, you spell my last name. M U, L, L, A, N, E, Y.

[A]

Right?

[B]

You can just name me as the primary beneficiary and I'll take care of those taxes. Your heirs don't have to worry one bit about them.

[A]

Oh, goodness, I love that, Sean. And I want to just clarify also, because again, a lot of people, it's just lack of knowledge. A lot of people fear taxation. As we've talked about this entire hour, for the vast majority of heirs of estates and also recipients of gifts, I think it's important to clarify that recipients of gifts and heirs in very rare cases pay tax on the receipt of those gifts or the estate. Right. Like, because there's the massive exclusion for estates that is a lifetime exclusion. So we're talking about something distinct here, which is, and guys, I want you to clarify because obviously, again, you're, you know this much better than I do, but there is a massive exclusion. So again, people worry like, oh, I'm going to get this windfall from My parents estate. And I'm going to immediately have to turn around and sell everything and pay taxes on it. Like, you know, the quote unquote death tax and all this nonsense. Like the vast majority of people, 90x percent of people paid $0 on receipt of this.

[B]

Well, so let's talk about two different taxes, right? One is the estate tax tax and in this case, most likely most estates in the United States, even very affluent folks, even people worth $10 million, there'll be no estate tax at the time of death and that is incurred. You know, the estate pays that and that's paid within the first year after death, generally speaking. So that's one concern. Then the other concern is a very legitimate concern. And I was joking a little bit. I'm not against folks who want to prioritize the kids tax. And maybe, you know, the kid is in the 37% bracket and you're in the 22% bracket and you just want to short the IRS 15 cents on the dollar and you're doing fine financially. I'm all for it, go for it. There's nothing wrong with that. But I also don't find that all that compelling. If the kid's already at 37%, they're doing just fine. They can more than afford the tax. The other thing too is, you know, so yes, the traditional IRA creates taxable income to the heirs. It might be that there's one heir, but maybe they're early retired or they maybe you got five kids. Well, now you've just sliced and diced that IRA into five different tranches. The other thing, you know, I wrote a blog post about this years ago or not that long ago, but it's called the church ira. Maybe you just add your church or favored charity as another kid and so you slice and dice that so that IRA is smaller and smaller when it's inherited because maybe the church gets a sixth or a quarter or a third and you're taking away from the kids, but you're also taking the highest taxed amount away from the other kids. So that's a thought. There are different ways where this can be good, but just think about it. If it was a single heir and they're taking out $400,000 a year, it's generally out to be taken out over 10 years. So maybe they start taking out $400,000 a year. Well, $400,000 is wildly in excess of the income of the vast majority of Americans and may even be in excess of the income of the vast majority of most listeners to the choose of iPodcast, which tends to be a more affluent audience. So, yeah, I get it. There might be some tax inefficiencies there, but it's tax inefficiencies on somebody who is doing remarkably well financially. So, you know, look, I'm not here to say you can never do tax planning, including Roth conversions to benefit the next generation. Far from it. But I think we have to step back and say, what is the fundamental job of that retirement account? And the fundamental job of that retirement account is not to manage someone else's tax liability. It's to get you and your spouse to and through retirement with financial success.

[A]

I think that's the perfect way to leave this episode. Gentlemen, this has been fun. So I mentioned your book earlier, Tax Planning to and through Early Retirement. I highly suggest it to everybody. Cody, people can find you at measure twicemoney.com. sean, you have your [e-mail]. is there anywhere else you guys want to send people for me?

[B]

You can go to my blog, fitaxguide.com, it's sort of my Internet home. You can find articles I've written, links to the book, all that sort of good stuff.

[C]

And for me, you can go to also the YouTube channel, measure twicemoney.com, you can see some step by step calculations of how these types of things work. Watch real retirees talking about their retirement and all these fears and anxieties that come with it.

[A]

All right, guys, as always, thank you. I think you might be our two most frequent guests ever on the choose of I podcast. Love having you both on. Love your expertise, Sean. I know you don't love that term, but nevertheless, I love your expertise. So I'll, I'll put that word in your mouth for you. But as always, to everyone listening, this is really important stuff and I think it's important to seed your brain with just this knowledge. Okay? This might not be applicable to you today, but it's the mindset of there's no imperative. There's nothing you have to do in fi or early retirement or traditional retirement. There are a range of options and your life is going to be different than mine is different than Sean's, is different than Cody's, and you have to do what works best for you. But not listening blindly to influencers who are telling you you have to do X. Because this is the tax planning item du jour, right? Like, it doesn't work that way. You just need to understand the whole range of options. And again, not let fear guide you. And I think that's what these guys did so wonderfully this episode. I think this is a really valuable one. And as always, thanks for being here along the ride.