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Don't Make THIS Common Roth IRA Mistake

Money Guy Show

Wed Mar 19 2025

Ask Money Guy | March 18th, 2025

Summary

Money Guy Show – Episode Summary: "Don't Make THIS Common Roth IRA Mistake"

Release Date: March 19, 2025
Hosts: Brian Preston and Bo Hanson

Introduction: Avoiding Common Roth IRA Pitfalls

In this insightful episode of the Money Guy Show, hosts Bo Hanson and Ruby delve into a prevalent mistake many investors make with their Roth IRAs: over-contributing. They emphasize the importance of recognizing and rectifying such errors to maintain a healthy financial trajectory.

Ruby kicks off the discussion with a strong warning:

“[00:30] Ruby: Don't do it. Do not make this common Roth IRA mistake.”

Understanding and Correcting Roth IRA Over-Contributions

Bo Hanson provides a comprehensive breakdown of the over-contribution issue:

“[01:55] Bo Hanson: ...you can recharacterize, reclassify those contributions that had previously gone into your Roth IRA. You can recharacterize, reclassify them as a traditional IRA contribution. And the good news is, if you catch this before you file your tax return and you recharacterize, you get to move those contributions from the Roth into the traditional as well as the earnings attributable to those contributions.”

He further explains the consequences of missing the tax filing deadline, highlighting the potential taxes and penalties involved.

Optimizing Your Savings Rate with Variable Income

A listener named Aman (or Ammon) asks about incorporating overtime and rental income into his savings rate calculation. Bo advises saving 25% of your gross total income, ensuring that all income sources are accounted for to achieve financial independence efficiently.

“[07:20] Bo Hanson: ...you're going to save the right amount because we have a great resource. If you go to moneyguide.com resources, it's not called how much can 25% do for you? I think it's called how much should I save?”

Listener Q&A Highlights

1. Managing a Substantial Roth IRA Balance

JB shares his situation of having $300,000 in Roth assets at age 30. Bo commends his achievement and discusses whether diversification is necessary.

“[12:58] Bo Hanson: Do you think that it's time for you to diversify? I don't know. I need to know more about what your long term plan is. Is it okay that you have a ton in Roth and that amount of Roth is going to continue to increase? Yeah, I think so.”

2. Purchasing a New Family Car Without Guilt

Emily and Josh F. express guilt over spending saved money to buy a new car for their large family. Bo advises distinguishing between needs and wants, emphasizing that spending on necessities like a reliable vehicle is justified.

“[18:39] Bo Hanson: If you need a new car, that’s a need. I think that is something worth noting, worth thinking about, worth thinking through now...”

3. Navigating a 403B Plan Without Employer Match

JP inquires about managing a 403B plan that offers no employer match and has high fees. Bo encourages contributing despite subpar options due to the significant tax incentives.

“[30:19] Bo Hanson: ...even if the funds aren't great and the expense ratios are higher than I like, it's going to take a long time for me to eat up that 30% embedded rate of return that I'm receiving. So I still like doing it.”

4. Automating Roth IRA Contributions on a Tight Budget

JW116 asks for the best method to automate Roth savings. Bo recommends setting up automatic monthly contributions to ensure consistency and reduce the likelihood of budgeting errors.

“[37:17] Bo Hanson: The best way to set up... make it automatic and make it easy...”

5. Dollar Cost Averaging vs. Lump Sum for Roth Conversions

Steve W. seeks advice on whether to dollar cost average $1,000 a month or make a $10,000 lump sum Roth conversion amidst a market downturn. Bo advocates for dollar cost averaging to mitigate emotional decision-making and capitalize on market volatility over time.

“[40:20] Bo Hanson: One of the reasons we love dollar cost averaging is that it removes emotions from the equation...”

6. Considering IRMAA in Roth vs. Traditional IRA Decisions

Curly Q. questions whether to factor in IRMAA (Income-Related Monthly Adjustment Amount) when choosing between Roth and Traditional IRAs. Bo explains that while IRMAA is a consideration for those approaching Medicare age, the primary decision should hinge on tax rate projections.

“[46:10] Bo Hanson: I would let that be the determination of whether I should make pre-tax or Roth contributions.”

Key Insights and Recommendations

Catch Mistakes Early: Identifying over-contributions before tax filing deadlines can save substantial taxes and penalties.
Comprehensive Savings Strategy: Include all income sources, including variable ones like overtime and rental income, to accurately set and achieve a 25% savings rate.
Roth IRA Growth: Continuously building Roth assets can significantly benefit from tax-free growth, especially when started early.
Embrace Necessary Expenditures: Spending on essentials, such as a family car, should not induce guilt if it supports your lifestyle and safety.
Maximize Tax Benefits Despite Limitations: Even with limited 403B options, contributing can yield significant tax advantages. Advocate for better plan options when possible.
Automate Savings to Ensure Consistency: Automatic contributions reduce the risk of missed investments and enhance long-term growth.
Strategic Roth Conversions: Dollar cost averaging for Roth conversions can leverage market fluctuations and mitigate emotional biases.
IRMAA Considerations for Seniors: While important, IRMAA should be weighed alongside broader tax strategy considerations, especially in relation to future tax brackets.

Conclusion: Empowering Your Financial Journey

Bo and Ruby reiterate their commitment to guiding listeners through intricate financial decisions, emphasizing proactive planning, consistent saving, and informed investing. They encourage listeners to utilize resources available on moneyguy.com and consider reaching out for personalized advice.

“[53:50] Ruby: ...all of that lives on moneyguy.com resources...”

The episode concludes with a heartfelt acknowledgment of their mission to demystify financial strategies, enabling listeners to achieve financial independence and a fulfilling life.

Notable Quotes:

Bo Hanson [01:55]: “If you catch this before you file your tax return and you recharacterize, you get to move those contributions from the Roth into the traditional as well as the earnings attributable to those contributions.”
Bo Hanson [07:20]: “How much should you save?... How much should I save?”
Bo Hanson [12:58]: “Do you think that it's time for you to diversify?... I think so.”
Bo Hanson [18:39]: “If you need a new car, that’s a need...”
Bo Hanson [30:19]: “...even if the funds aren't great and the expense ratios are higher than I like, it's going to take a long time for me to eat up that 30% embedded rate of return that I'm receiving. So I still like doing it.”
Bo Hanson [37:17]: “The best way to set up... make it automatic and make it easy...”
Bo Hanson [40:20]: “One of the reasons we love dollar cost averaging is that it removes emotions from the equation...”
Bo Hanson [46:10]: “I would let that be the determination of whether I should make pre-tax or Roth contributions.”

Resources Mentioned:

Money Guy Resources: moneyguy.com/resources
Financial Order of Operations
Money Guy Tumblers Giveaway: Email winner@moneyguy.com to participate.

Disclaimer: The hosts, Brian Preston and Bo Hanson, are partners with Abound Wealth Management, a registered investment advisory firm regulated by the SEC. The information provided in this episode is for informational purposes only and does not constitute financial, tax, investment, or legal advice.

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Transcript

Bo Hanson (0:01)

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Ruby (0:30)

Don't do it. Do not make this common Roth IRA mistake.

Bo Hanson (0:39)

Ruby, I am so excited because we know that sometimes in life mistakes happen. Sometimes something goes a different way than we had planned or anticipated. And so then we have to figure out, how do we reconcile, how do we fix it? And that happens all across our financial lives. And one thing that I love is that we get to sit in these seats and help you figure out how to correct those mistakes or maybe even how to avoid those mistakes. So if you have a question or there's something that you're curious about or you want us to weigh in on it, we have the team right now out in the wings collecting your questions, and we want to load you up because we do believe that there is a better way to do money. So with that creative. Almost said your name wrong, Creative director Ribe, I'm gonna throw it over to you.

Ruby (1:25)

Yeah, we do have a question about this potential Roth IRA mistake. I think it's a great question from Josh R. It says, I over contributed to my Roth IRA this previous year in 2024. And that's the thing that I think you don't expect it to pop up, but it could. So it was due to making too much. Can I recharacterize the contribution and earnings as a traditional IRA and then do a backdoor Roth before filing? So he has a solution here. Do you think it's a good one? What should you do in this situation?

Bo Hanson (1:55)

I love this. So the first part of his question is, hey, I over contributed. One of the things that's just worthwhile knowing is if you work with a large custodian like Fidelity or a Vanguard or a Schwab, they won't actually let you over contribute. They won't let you put more in than whatever the annual limit is. And right now, for those under 50, the annual limit is $7,000. But what it sounds like happened, and it says in this question is, well, I over contributed not in the fact that I put more than the limit in there, but what I actually did is my income was higher than I.

Ruby (2:25)

Thought it was going to be.

Bo Hanson (2:26)

It's a really good problem to have you crossed over the income threshold. Let's say, hey, you can't do Roth contributions, or maybe you're in that phase. Hour says you can do them, but you can't do all 7,000 of them because there is an income threshold that if your income falls in there, you can only do a certain portion of the Roth contribution. So whatever do I do? Well, here's the good news. You've caught this and you've recognized it before we get to the tax filing deadline. Since you've done that, one of the things that you can do is exactly what you asked in your question. You can recharacterize, reclassify those contributions that had previously gone into your Roth ira. You can recharacterize, reclassify them as a traditional IRA contribution. And the good news is, if you catch this before you file your tax return and you recharacterize, you get to move those contributions from the Roth into the traditional as well as the earnings attributable to those contributions. Because a lot of times what will happen is people won't pay attention to this, won't notice this. They'll get past the tax filing deadline, they'll get a letter, oh, turns out that I put money in there that I wasn't allowed to and I filed my tax return and it was not right. Well, then what I'll do? Well, if that happens, you don't get to recharacterize a contribution. You have to do a return of excess contribution, where now instead of pulling, putting the money from one account into the other, you have to actually refund those contributions, refund those earnings. The earnings are going to be subject to taxes and are going to be subject to a 10% penalty. So if you can catch this early on, it really, really, really makes your life a whole lot easier. So recharacterizing is a great tool to use. And you can put them into the traditional, assuming that you have an account structure that will substantiate this, you can recharacterize to the traditional, and then you can do a Roth conversion and then convert those contributions to Roth. So basically, you're sort of backdooring into doing a backdoor Roth. But when you do that, the earnings would be taxable. You would have to convert the, you could convert the after tax portion that went into traditional, and the earnings would be taxable as part of the conversion. But it's a great solution. And so, Lynn, last thing that I would just throw out here for Josh is if you're close to that threshold, if you are someone who's like bumping up against the Roth IRA limits or you think you might be, you may want to move away from being like a monthly Roth contributor. And we love monthly contributions, we love dollar cost averaging. But it might make sense to move to an annual contributor where essentially you save up that money in an after tax account or you put it into a broke into a high yield savings account and you just wait until you get to January. And then when you get to January, you look, okay, what was my income last year? Where did I fall? Did I qualify for Roth? If I did, great, I'm just going to take that money and I have up until the tax filing deadline to fund my Roth for last year. If I did not, well, okay, great. Can I do a backdoor Roth? I can put it in additional. I can convert. I think you're just going to save yourself a lot of headache because generally what happens is someone will do this, they'll run a foul of this once and then they recognize, oh my gosh, I got to go undo 12 contributions and recharacterize. Oh, da da, da da. You'll only do it once and you'll recognize, man, it's just a lot easier to get it right the first time and not have to go screw, not have to go back in time to fix it.

Bo Hanson (15:11)

Let me actually answer your question now. Should I diversify? Well, can I have too much of a good thing? I don't think so. Roth is especially valuable because if you are in that 12% bracket, I'm going to argue that odds are later on in life, at some point in your future, you're going to be in a higher tax bracket. So right now, the current year tax deduction is likely not as valuable for you. So walking away from a 12% tax deduction, doing pre tax contributions is probably okay. And you're so young at 30 that every dollar you can save is going to compound. Was it 23 times for a 30 year old? Based on our wealth multiplier, by the way, you can check yours out@moneyguy.com resources. So Roth makes a ton of sense for you. So is it okay if you just build up and continue building all your assets in Roth? I'm gonna say yeah. I don't, I don't think you need to shift to focus on the pre tax now. One thing I would encourage you to think about though, seems like you're ahead of the game. Okay, am I going to retire early? Am I part of the fire movement or the fine movement? Do I think that I might want to access these dollars Sooner than age 59 and a half, which is traditionally when I would start tapping into my Roth assets. I'm going to say as that begins to take shape and as that begins to come more clear, you may want to think about your third tax bucket. You may want to think about, in addition to maxing out my employer sponsored account in Roth and doing backdoor Roths, do I have excess cash flow to fund an after tax account? Because that after tax account very well could be the bridge that bridges you for the time that you leave the workforce until you get to 59 and a half. I do think that is something worth noting, worth thinking about, worth thinking through now before all of you financial mutants out there get on me. Yes, I recognize inside of Roth iras you can tap into the basis. And if you're building up that much Roth and you have that much basis, then you can actually draw down on those assets before 59 and a half. Totally true. But the benefit of Roth is tax free growth. So the longer that I can allow it to build, the longer that I can allow it to compound, the more tax free growth I can accumulate in the account, the better off I will be. So do I think that it's time for you to diversify? I don't know. I need to know more about what your long term plan is. Is it okay that you have a ton in Roth and that amount of Roth is going to continue to increase? Yeah, I think so. I don't think there's anything. I don't think there's anything wrong with that.

Bo Hanson (19:11)

I'm trying to think of. Would you say it feels messy, even? I would say, okay, messy. I would imagine that Emily and Josh also feel this. I feel like they're probably in the middle stage of their life and it's a very, very messy stage. And they have five kids, so I have a lot of stuff pulling on them. And I think it's great that you have this mentality around, oh, I don't want to spend money. I hate spending money. I know that my money can work. I know that we want to save. But you do have to weigh needs versus wants. When I hear you have five kids, we. I've done this before, not had five kids. I have been an automobile that broke down. Now, it was not an old automobile. It broke down with my wife and two kids in it. At the time, we had two kids, and it sucked. Like, you got a baby in a car seat sitting back there, and all of a sudden the car won't crank up, and it's like 92 degrees outside. It's just an awful scenario. If your car is so old that you're beginning to think that that's one of the places you may be that, oh, okay. If I'm somewhere, my spouse is somewhere, and the car breaks down, the family's stuck, and now we can't get to our job. Well, that's a need. If it's. Ah, I just. Man, we. When we got that car, it was red. And I really don't like red cars. I really want a blue car. That's not a need. So you have to assess for yourself. Is this a need? Is this a want? And by the way, I just want to be clear here. Neither of them is bad. Neither of them. It is okay to want a new car. I think so many people in the personal finance space try to, like, criminalize or demonize the idea that some people want nice cars, and that's okay. You just got to do it. So long as you're not sacrificing the other stuff, so long as you're not running a foul of 23, 8. If you're buying a luxury car, you got to pay it in cash or pay for it all in, you know, inside of the 12 months, there's nothing wrong with those things. But if you're in this situation where you're trying to figure out, how do I fund all my goals? Okay, yeah, I'm saving and I'm building, but, man, I'm not so flush that I can, like, go do a new car without sacrificing some of these other saving goals, if it's a need and it's something that's like a family safety issue or a reliability issue or, hey, our car was great when we had three kids, but now that we have five kids, it just doesn't work. And I got to, like, put, you know, one Kid stacked on top of the other kid in the backseat. Well, that's a problem, because at the end of the day, money is nothing more than a tool that allows us to accomplish the things we want to accomplish. Well, one of the goals that we might have is getting to work every day, keeping my family safe, being able to transport my family across town in one trip and not two trips. If you find yourself in that situation and buying a new car is a requirement, is a need, I think it's okay to do that, and I think you can do that without feeling a lot of guilt. Now, I want you to be prudent and be practical about it. Now, here's the hard part about five kids, seven people. Not a lot of cars can traverse seven people. So you're kind of limited. You got to go big suv, you got to go minivan. You got to do something that. So I want you to be reasonable and practical and pragmatic in the automobile that you choose and whether you go new or used and what brand, all those kinds of things. But if you need a new car, you needed a new car. That's part of the journey. That's part of the process.

Bo Hanson (27:06)

No, this. This is awesome. So do you happen to. You don't have it? Of course. See, Brian's not here. We don't have the thing. Can't hold it up. Hey, if you would like your own copy of the financial order of operations, you can go to moneyguy.com resources and download your free copy. So this is what Matthew is saying. Hey, I've been working through the financial order of operations and I got to step four emergency reserves, which says that I should have three months of living expenses or six months of living expense. This is why we have the best team, the best team in all of financial content right here. I've got all of my step four covered and I've built up my three to six month emergency fund. Do I still need to continue funding that goal or should I move on? And the answer? Well, the answer is technically it depends. And I'll tell you why it depends. But the answer is yes. Like once you complete a step of the financial order of operations, it's designed to then go the next step. Hey, do I have my deductibles covered? Great. Now I'm going to get my employer match. Hey, do I. Am I maxing out my employer match? Great. Now I can go pay off my high interest debt. Is all of my high interest debt wiped out? Great. I can do emergency fund. Is all of my emergency fund fully funded? Great. Now I can go. I felt like I had to do it. Now I can go to step five. Now I can go to my tax free savings opportunities. I can fund my health savings account. I can fund my Roth ira. Yes, you absolutely can. Move on and move through. Now here's the one caveat. Unless there are other short or intermediate term goals that you know you have to save for, hey, I know that I'm going to have to replace my car. I know I have this expense coming up. I know I have this thing that's not really an emergency because emergencies generally tend to be the unknown unknowns. I lost my job. I had a medical thing. I had something break that wasn't counting on breaking. That's different than a thing that I'm planning for. I need a new car. I'm going on a trip. I'm have this thing coming up. So if you have some short term goal, it may make sense to continue saving cash above and beyond your emergency fund so that when that thing comes your way, you have the cash and capital to be able to satisfy that. Absent that being the case, yes, go to step five, start doing your hsa, start doing your Roth ira, start doing your backdoor Roth ira. And then go to step six, start maxing out that employer sponsored retirement account. Take it all the way up to the annual limits. $23,500 if you're under 50. And then once you do that, start thinking about that third bucket, get into hyper accumulation, start building up that after tax about after tax account, you just kind of plug your way through the financial order of operations. By all means, when you complete one step, go to the next one.

Bo Hanson (30:20)

You can't. So you may be thinking, oh, I've heard the guys talk about this wonderful thing solo 401ks. That sounds incredible. I want a solo for my 401k. Stinks. I'd rather have my own at Fidelity where I can control it. And as wonderful as that sounds, it's not allowable, it's not permissible. Solo 401ks are available to business owners or entrepreneurs who only have themselves as an employee or themselves and their spouse. So that's what a solo. If you're a W2 employee that does not own the company, you just work for the company, you're kind of captive to the plan that you have available to you. So what if I am in a plan that does not have a match and has kind of crappy. I'm sorry, bad language. That has kind of bad investment options. Well, what do you do? Okay, first you go to the financial order of operations, right? You can get your free copy@moneyguy.com resources. Well, you get to step two, employer match. You say, okay, I don't have an employer match. I don't have anything there. What do I do? You go to the next step. High interest debt, Boom, knock it out, emergency fund. Boom, knock it out. Then you get right here to Roth hsa. You go and max those out, max out your Roth, max out your hsa. And then you get to step six, max out your employment account. Well, whatever do I do? Remember I don't get a match on the 403 and the investment options aren't great. What I have to remind people is that one of the reasons we love employer sponsored retirement accounts is for the tax incentive available in them. And the tax incentive goes one of two ways. I can put in pre tax contributions and I can save money on my taxes this year when I put money in. So if I'm in a high tax bracket and I add up my marginal rate and my federal rate and it's above my marginal federal and marginal state rate, it's above 30%. Every dollar I put into my 403B can save me 30 cents in taxes. Do you recognize that's kind of like a 30% rate of return is kind of like. So even if it's expensive, even if the funds aren't great and the expense ratios are higher than I like, it's going to take a long time for me to eat up that 30% embedded rate of return that I'm receiving. So I still like Doing it. All right, well what about the other hand? Well, on the other hand, even if I, if, what if I don't do the pre tax force? What if I do Roth? Well, I don't have that tax savings, but what have I done? I'm now getting more money in my Roth bucket that won't be taxed in the future. It's going to continue to grow tax free. So there might be a reason for you to fund your 403B whether you're doing it pre tax or whether you're doing it Roth simply for the tax savings. And then what you try to do is you pick, you pick the worst of the crap, you pick the best of the worst. You know what I mean? You go, you go in there and you're like, all right, are there any low cost index? Well, maybe they're not a bunch, but there's one. There's a really good S and P fund. Okay, I'm going to use that. And then with the other parts and pieces of my portfolio, I'll supplement. So that way I get like a rounded allocation. Okay, maybe these target equal funds aren't perfect, but they're good enough. And I know that right now, if I'm early on in my investment career, early on in my trajectory, I know that my savings rate is way more important than my rate of return. So maybe, yeah, it's a little bit more expensive. And yeah, the options are great, but I'm still going to fund it, I'm still going to put it. And then, and this is something I don't think people realize, it is perfectly possible to be an advocate for yourself. We have had people say to us, we've gotten these emails, guys, you told me that this was possible and I didn't believe it. But I listened to your show and I went to my HR department and I said, hey, did you realize that we have some pretty less than ideal options inside our 403B? Have you ever considered maybe using a company like Fidelity or maybe adding in some low cost indices, an S&P 500 index, a Barclays bond index, international. You know, there's some really great, hey, by the way, here's a menu of options you could consider adding. And the person looks at it and HR goes, oh, yeah, yeah, we can do that. Oh, no one's looked at, we put this plan in place 15 years ago. We haven't looked at it since. Yeah, and you can improve that. It doesn't have to change anything about it. But you can advocate for yourself and you need to communicate to them, hey, here's why. It's not just good for me. This isn't like self serving. It's good for me, but it's also good for all my colleagues and all of my co workers and the owner of the company or the executives of the institution. And you can advocate and you can communicate with them why making the plan better is actually better for everyone. It's a long way of saying yes. I think there's still merit to contributing to it if you can, because there are some tax incentives available. But I'd also think that it makes sense to advocate for yourself to see if perhaps you can improve the plan.

Bo Hanson (40:20)

Dollar cost averaging $1,000 a month, 401k to Roth conversion or 10k in December all at once. I don't understand your question. Oh, but I'll answer it. I'll answer. I'll give you some answers. And if I give you enough of them, hopefully one of them sticks. Let me first part of the question that this could be. Hey, market's volatile right now. Should I front end my savings? That's not a bad idea, right? Market's down, front end, I buy more. What if this is just the beginning? What if the market continues to go down from here and you get all of your savings done right now and for the rest of the year the market continues to go down and you miss that opportunity to buy lower and buy lower and buy lower. One of the reasons we love dollar cost averaging, that it removes emotions from the equation. Now when we say that our natural bent is always the thing. Oh, we'll remove emotion. We want to remove the fear emotion. We want to remove that side of the equation. It also helps remove the greed emotion. Oh, I'm going to do it. Now, do it now. Do it now. It allows us to have a plan in place and stay steady and stay consistent. So, okay, should I do $1,000 every month for the rest of the year? Should I do 10,000 at the end of the year? I like the idea of staying systematic with that. All right, that could have been your question. Here's the second part. That could have been your question. Hey, I'm someone who's doing Roth conversions every year to max out my tax bracket, which I love, by the way. If you haven't checked out Making a Millionaire, we actually have a couple on there showing them that maximizing their tax bracket doing Roth conversions could literally add millions of dollars to their terminal value of their portfolio. So if you haven't checked that out, make. Make sure you go do that. Maybe you're that person now. If you are and you've been saving, or maybe you retired financially independent, you're thinking, okay, should I wait till the end of the year to do my Roth conversion, or should I do it now? This one gets a little nuanced, and this is where it gets a little hairy, because I do like the idea of Roth converting during volatility, as you imagine. Let's say that 10,000 is your number. You had a S&P 500 index. I'm going to put it up here. And, you know, it got hit. And so it's down here right now. And It's. I got $10,000 here, and if I convert this to Roth while the market is down, you know, I pay tax on. That's the taxable amount, and I pay tax and comes over here, you know what happens when the market recovers?

Bo Hanson (42:48)

Yeah. You. You recover inside of your Roth. Yes, you recover. So if you are someone perpetrating the strategy and there is a big entry or decline, and you are a Roth con, it might make sense to do that. We've done this for tons of our clients. You know, we have a lot of clients who we do bracket maximization on. And every year we might convert 60, 70, 80, $100,000 to Roth. But here's where we try to be cute and clever with it. The hard part of bracket maximizing early on in the year is we don't always know exactly what our taxes are going to look like when we're in March. We don't know what our dividend income is going to be. We don't know what our capital income is going to be. We don't know other income sources that might come our way. So if you do a tax projection and you convert the amount that you think is going to maximize that bracket, and then you have more income come throughout the year than you thought you were going to have, well, now you've blown into the next bracket, and maybe it wasn't such a great decision. So what we do is we try to be conservative in our estimation, and let's say that you're going to convert $100,000 as your plan. We realistically might convert 60 or 70,000 in March right now, while there's volatility, while there's an opportunity. But we still give ourself enough wiggle room so that by the time we get to the end of the year, if we did have more income sources, if we did have dividends, if we did have it, if we did have capital transactions happen, we gave ourself a buffer in margin that we can still convert in December and still hit the top of that tax bracket without blowing over, without causing some other issues like Medicar surcharges or Medicare surcharges or losing the child tax credit or whatever the thing for your tax situation might be. So that very much could be a viable strategy if you're talking about converting to do bracket maximization. But you need to make sure you understand what you're doing. This is one of those areas, Steve, that it gets. I imagine a lot of people, as I was going through that, eyes kind of glazed over, rolled the back of their head like, I don't know what he's talking about. And that's, that's because this is like, this is more like complex financial planning. You want to make sure you do it right. This is one of those areas that if you do find yourself in the situation, okay, well, I do want to do Rothkin conversions, but do I do them in the beginning of the year, end of the year, and how do I do an accurate tax rejection and make sure that I stay inside those thresholds? If you're asking those kind of questions, this might be the time that it makes sense to think about taking the relationship to the next level. That's what we do here. It's what we call the abundance cycle. You come in, you learn as much as you can, and we load you up. It's not like there's a paywall here for you to get great information. We want to load you up, that you learn and you apply it to your financial life so that your life gets better and better and better and better. Your financial situation grows and grows and grows and grows to one day you get to the point where like, all right, I did great saving, I did great accumulate, I've built, man. What he just walked me through with that Roth conversion strategy. I don't want to do it wrong. I don't want to make a mistake. I don't want to have a miscue that I was not planning on. We would love to be that resource to help you navigate that, because that's what we do for hundreds of clients every single year, serving people asking those very questions. So if you're in that situation, if you're someone who thinks you might need that kind of solution, go check out our Work with us. You can go to moneyguy.com moneyguy.com, work with us, or you can go to aboundwealth.com work with us. We would love for you to consider fulfilling the abundance cycle to make sure that you measure 2, 3, 4, 5 times and cut once when it comes to some of these advanced planning tactics.

Bo Hanson (47:04)

There you go. Income related month is that monthly adjustment amount. Income related month. Basically, this is what a Medicare surcharge is. As you know, when you hit age 65, you enroll in Medicare, you go on a different type of health insurance than you likely had previously prior to age 65. Well, one of the things that happens is there are costs associated with a Medicare. You go on depending on the plan you choose and how it works. Well, if your income is over a certain threshold, there is a surcharge that you pay on a monthly amount for your Medicare premiums and it's reassessed every year based on your income two years ago. I know that sounds confusing, but if I were in the Medicare age right now, which I'm not, the amount I pay for Medicare would be based on my income from two years ago. Right. So a lot of planning later on in life for folks in their 60s is around. Well, I don't want to have too much income because I don't want to trip this Medicare surcharge because it could be, because it could be substantial for a household. You know, you could have a Medicare surcharge of 200 plus dollars a month. So you think about that's another, you know, 25, 24, $2,500 that could happen. That if you do just a little bit of planning, stay under that. So the question becomes how much of an issue is this and how should I think through this? Now Curlicue's question was, well, how do I think about this with contributions? And this is where I imagine Curlicue is going. If I build up too, too much in a traditional ira, then when I go to pull that money out later, it's going to be taxed as ordinary income. Or when I get to age 75, I'm going to have required minimum distributions. If that accounts big, my income will, I will not be in control of my income anymore. There's a chance I'll push through the Medicare surcharge limits. Yes, that's true. If I do Roth, then when I go to pull income out of the Roth, it's not going to be taxable, be tax free. And at age 75, there are no RMD requirements for Roth IRAs. So should I take that in consideration? My opinion is when it comes to making Roth versus traditional assumptions, it's really based more on a tax rate arbitrage, less so than like little nuances like IRMAA or Medicare premiums. And the tax rate arbitrage is do I think I'm in a higher tax bracket now than I will be in the future or I think I'm in a lower tax bracket now than I will be in the future. I think I'm going to be in the same tax bracket. If you're in a high income tax bracket now, 30% and above. We think that pre tax contributions make tons of sense. You put a dollar in, you get a tax deduction this year you can think about it like a 30% plus imputed rate of return. If I'm in a low tax bracket. I'm not getting a huge tax benefit this year. It's going to grow tax free. I'll likely be in a higher tax bracket in the future. Pull it out tax free. I would let that be the.

Bo Hanson (49:50)

I would let that be the determination of whether I should make pre tax or Roth contributions. And then when you get into your 60s and when you begin making decisions around like Roth conversion amounts and when to take Social Security and which one of your three buckets to start pulling from, that's where the IRMA surcharge comes in. That's where you're really going to want to measure and think about how you're doing this. Now. One small, small note. I find it hilarious because look, we work with a lot of, we work with, well, we work with all kinds of people here, but a lot of our people are wealthy, like multi, multi, multi millionaires. I'm always amazed when I'll have someone with a huge portfolio. And we're recommending a strategy that's going to like convert hundreds of thousands if not millions of dollars over the course of a planning period from Pretext to Roth. They'll bet. Well, Bo, there's going to be a Medicare surcharge and I have to remind them. I'm like, yeah, you're going to pay $2,500 for this Medicare surcharge this year for me to convert $300,000 to Roth for it. Like you got like the juice is worth the squeeze on that. So in all of our financial decisions, I don't want you to be penny wise and pound foolish. I don't want you to miss the forest for the trees because you're focusing on this one thing like a Irma surcharge. Now for a lot of our folks, we do want to avoid IRMAA because it sucks. We don't want you paying it. It's just a waste of money. If we can't avoid it, we should. But there are other times where it makes sense to blow through the IRMA surcharges, to blow through the tiers because the tax planning on the back end substantiates and corroborates that decision. So I would just make sure again, this is one of those areas. It's really, really nuanced and no two financial situations are the same. You can have two 65 year olds in front of me. One of them, Irma will be a huge consideration that we want to make sure we do not run afoul of the other. IRMAA could not be less significant to what they're trying to accomplish in their financial life. So while we note it, we note it, blow through it, and then I don't have to think about it again. Aren't you so glad you learned about the. Tell me again what it was. Income something.