Episode Summary: Roth Conversions, How Much and How Fast?

Podcast: Jill on Money with Jill Schlesinger
Host: Jill Schlesinger, CFP®
Guest: Mark Teo, Executive Producer
Release Date: January 16, 2025
Episode Topic: Strategies for Roth Conversions – Determining the Appropriate Amount and Pace

Introduction: Setting the Stage for Roth Conversions

In this insightful episode, Jill Schlesinger delves into the complex world of Roth conversions, addressing the critical questions of "How Much?" and "How Fast?" to convert traditional retirement accounts into Roth IRAs. Joined by her executive producer, Mark Teo, Jill navigates the intricacies of tax implications, financial planning, and strategic decision-making to help listeners optimize their retirement savings.

Listener Call: Navigating Roth Conversions

The episode features a detailed consultation with a listener, Coco’s Husband, who presents a comprehensive financial scenario:

• Retirement Accounts: $2 million in tax-deferred roll-over IRAs ($1 million each)
• Taxable Accounts: $6 million
• Roth and Tax-Free Assets: Approximately $600,000 (including a $100,000 Health Savings Account)
• Additional Assets: $300,000 in a 529 college savings plan, a paid-off house worth $1 million, and another overseas property valued at $200,000 (soon to be sold)
• Income Sources: Minimal, relying on appreciated stock sales and a small pension of $20,000 annually starting at age 65
• Expenses: $75,000 to $80,000 annually, including travel

Key Concerns: Coco’s Husband is considering initiating Roth conversions due to a lack of current income and seeks guidance on the optimal amount and conversion rate to minimize tax liabilities while ensuring financial stability.

Strategizing Roth Conversions: Expert Recommendations

1. Assessing Tax Brackets and Conversion Amounts Jill begins by evaluating the listener’s tax situation, noting that with an annual capital gain of $60,000 and previous conversions, the couple is likely in the 22% tax bracket.

Jill Schlesinger [09:17]: "But you pay. But wait a second. Just so I'm clear that would keep you in a 0% capital gains rate for married filing jointly? Because isn't that, doesn't that go up to like 90 something thousand?"

Recognizing the goal to stay within a favorable tax bracket, Jill proposes converting funds up to the 24% tax bracket. This approach allows the couple to convert significant amounts each year without crossing into higher tax brackets.

2. Leveraging Donor-Advised Funds To mitigate the tax impact further, Jill suggests utilizing donor-advised funds (DAFs):

Jill Schlesinger [12:11]: "I think you convert up to the 24% bracket, which I don't have the new brackets yet, but it would allow you to make have earned income of 3, 383,000. Okay. And I would do that plus the gifting the low basis stock into a donor advised fund."

By donating appreciated low-basis stocks to a DAF, the couple can both reduce their taxable income and create additional room for Roth conversions, effectively lowering their overall tax burden.

3. Managing Required Minimum Distributions (RMDs) Jill highlights the importance of considering future RMDs, which could impact the couple’s tax situation:

Jill Schlesinger [12:40]: "Requires some planning around RMDs kicks in, right? That's a possibility. Also."

Strategic Roth conversions can help manage RMDs by reducing the size of traditional IRAs over time, thereby decreasing the mandatory withdrawals that are subject to income tax.

Balancing Retirement Income and Tax Strategies

The discussion further explores balancing the couple’s retirement income needs with tax-efficient strategies:

• Living Expenses vs. Taxes: Ensuring that the couple has sufficient cash flow ($300,000 in taxable accounts and annual expenses of ~$80,000) to cover living expenses without needing to tap into converted Roth funds for tax payments.

• Estate Planning: Emphasizing the benefits of Roth IRAs in estate planning, as Roth assets are typically more advantageous for heirs due to their tax-free growth and distributions.

Jill Schlesinger [15:17]: "Is this a good kid? Is a kid gonna go to a good school going to like Washington State? What do you think?"

The goal is to create a sustainable and tax-efficient financial plan that secures the couple’s legacy while minimizing tax liabilities.

Final Recommendations and Takeaways

Jill synthesizes the conversation into actionable steps:

1. Convert Up to the 24% Tax Bracket: This allows substantial Roth conversions each year without pushing income into higher tax brackets.
2. Utilize Donor-Advised Funds: Donate appreciated stocks to DAFs to further reduce taxable income and create space for additional conversions.
3. Maintain Adequate Cash Reserves: Ensure that living expenses are covered through taxable accounts to avoid drawing from Roth IRAs for tax payments.
4. Plan for Future Tax Changes: Stay adaptable to potential legislative changes that could affect tax rates and conversion strategies.

Jill Schlesinger [17:24]: "I create a spreadsheet. I look at different scenarios. Hey, what would happen if I pulled out this much money? What would happen if I pulled out this much money. And that gives me a lot of peace because I think when I understand, like I trust the numbers, it doesn't mean they work a hundred percent of the time, but I do generally trust the numbers."

Jill underscores the importance of detailed financial planning and forecasting to navigate the complexities of Roth conversions effectively.

Conclusion: Empowering Financial Decisions

In wrapping up, Jill encourages listeners facing similar financial scenarios to reach out for personalized advice:

Jill Schlesinger [19:31]: "But maybe you have the similar kind of idea, like maybe I should get some of my money out of this traditional retirement environment. How can I do that without blowing up my taxes?"

By leveraging expert strategies and personalized planning, listeners can make informed decisions to optimize their retirement savings through Roth conversions.

Notable Quotes:

• Jill Schlesinger [09:17]: "But you pay. But wait a second. Just so I'm clear that would keep you in a 0% capital gains rate for married filing jointly? Because isn't that, doesn't that go up to like 90 something thousand?"

• Jill Schlesinger [12:11]: "I think you convert up to the 24% bracket, which I don't have the new brackets yet, but it would allow you to make have earned income of 3, 383,000. Okay. And I would do that plus the gifting the low basis stock into a donor advised fund."

• Jill Schlesinger [17:24]: "I create a spreadsheet. I look at different scenarios. Hey, what would happen if I pulled out this much money? What would happen if I pulled out this much money. And that gives me a lot of peace because I think when I understand, like I trust the numbers, it doesn't mean they work a hundred percent of the time, but I do generally trust the numbers."

For personalized financial advice and to explore strategies tailored to your situation, visit jillonmoney.com and reach out through the contact form.