Is Your Roth Conversion Timing All Wrong? (Financial Blunders) - 550

Summary

Podcast Summary: "Is Your Roth Conversion Timing All Wrong? (Financial Blunders)"

Podcast: Your Money, Your Wealth
Hosts: Joe Anderson, CFP® & Alan (“Big Al”) Clopine, CPA
Episode: 550
Release Date: October 7, 2025

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Overview

In this episode, Joe and Big Al dive deep into Roth conversion timing—one of the most commonly misunderstood aspects of personal finance and retirement planning. Through listener questions and real-world “spitball” analysis, they break down not just the mechanics but the strategic thinking behind Roth conversions and tax-minimization, with their trademark humor and spontaneity. Featured topics include Roth conversion timing for different life stages, balancing tax-deferred and Roth accounts, dealing with RMDs, the “age plus 20” contribution rule, and transitioning into a financial planning career.

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Key Discussion Points & Insights

1. Roth Conversion Timing: When And How Much?

Barry’s Roth Conversion Dilemma ([00:55]–[07:07])

• Profile: 62, single, retiring at 63, converting $20k/year of pre-tax to Roth; good pension, significant Roth and traditional savings, plans increased post-retirement spending.
• Questions: Should Barry continue conversions through retirement? Increase the amount? Is her timing optimal?
• Analysis:
  • Current Plan is Solid: Converting $20k/year up to the 24% tax bracket is reasonable given her income structure. Running close to the top of the 24% bracket likely makes sense for her, considering future RMDs.
  • Post-Retirement Conversions: Both Joe and Al recommend continuing (and possibly increasing) Roth conversions in the early years post-retirement (2027-2031), aiming to stay in the 22% bracket where possible, as RMDs and other income will later push her bracket higher.
  • State Tax Considerations: NY exempts the first $20k of IRA distributions; unclear if this applies to conversions, but they recommend optimizing around this rule when possible.
• Quote:

  "I like the idea of continuing conversions after retirement because...RMD income with [her] other income is going to push [her] past the IRMAA limits." — Big Al [05:47]

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2. Sequence Planning for High Earners & Couples

Jerry & Elaine: Retire in Six Years and Leave an Inheritance? ([07:17]–[16:21])

• Profile: Couple, mid-50s, $2M+ in retirement, high earners, planning substantial savings for six more years before retirement at 62; goal is to spend $120k/year and leave money to kids.
• Questions: Can they retire at 62 and still leave an inheritance? When should Roth conversions start?
• Analysis:
  • Retirement Feasibility: Their trajectory is “amazing”—with projected $3.7M+ at retirement and reasonable withdrawal rates.
  • Roth Conversion Urgency: With most wealth in deferred accounts, RMDs could balloon, pushing them into higher brackets later. Conversions in 22-24% brackets now (especially when one spouse retires and income drops) are prudent.
  • Tax Rate Uncertainty: While tax rules may change, it's generally better to take some tax rate uncertainty off the table and utilize Roth’s long-term benefits.
• Quote:

  "I'm willing to take that bet all day, every day, just to take the uncertainty off the table." — Joe [16:15]

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3. Young Professionals & Roth Strategy

Alex (31, Software Engineer) – Should I Convert My IRA All At Once? ([17:05]–[21:32])

• Profile: $150k salary, $250k in retirement accounts, wants a 50/50 Roth/pre-tax split, considering converting $57k IRA to Roth.
• Question: Convert all now, or shift gradually? And how to pivot into financial planning as a career?
• Analysis:
  • Financial Feasibility: Technically converting now in the 24% bracket is mathematically sound, especially since future income/tax rates likely to rise with career advances, but the real-world challenge is the $20k tax bill.
  • Practical Approach: Joe advocates for a gradual, less painful conversion, especially at 31; that $20k is “a lot of rounds of golf” and reducing liquidity for lifestyle.
  • Rule of Thumb: Don't get fixated on a 50/50 ratio without projections—model the endpoint to decide.
• Quote:

  "Put your money where your mouth is, Alex!" — Big Al [21:22]

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4. Careers in Financial Planning

Alex’s Second Question: How to become a fiduciary advisor? ([21:32]–[29:04])

• Advice:
  • Start with CFP coursework and certification—the industry’s “gold standard.”
  • Explore fee-only RIAs (Registered Investment Advisors) for fiduciary, product-neutral advice. Avoid sales-driven or “insurance-first” shops.
  • Networking—talk to planners, ask about firm culture/training; seek informational interviews, especially at NAPFA-member firms.
  • Path is often paraplanner/client service associate → CFP → client-facing advisor.
  • Ethics are non-negotiable; culture fit is vital for long-term satisfaction.
• Quote:

  “Everyone looks the part...and then all of a sudden, you’ve got sales quotas. There’s no help to actually help [clients]—and you’re not getting paid all that much...The industry is still like that in a lot of places.” — Joe [22:58]

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5. Paying Taxes on Roth Conversions/Withdrawals

Mike from Philly – Use Conversion Funds to Pay Taxes? ([29:04]–[35:46])

• Profile: 58, $2.6M in tax-deferred, $750k tax-free, $850k brokerage, plans to retire soon, concerned about future tax hikes.
• Questions: Should you ever pay conversion taxes from the IRA/401(k) itself? Should you withdraw early to blunt future taxes?
• Analysis:
  • Using IRA to pay conversion taxes: “Rarely, but not never.” Only in cases of massive IRAs and no other liquid assets. If possible, use outside funds—paying taxes from IRA is effectively “paying tax to pay the tax.”
  • Blunting Future Taxes: Drawing down (via spending or conversion) before RMDs is a sound tax-evening strategy; 2.6M could double or more before RMDs kick in.
  • Debt for Conversion: Joe would rather take a home equity loan than pay taxes from the IRA (with moderation/warning).
• Quote:

  “You’re paying tax to pay the tax to pay the tax. No!” — Joe [35:09]

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6. Roth Distribution Rules & The 5-Year Rule

Lisa (Nebraska): Roth Withdrawals Confusion ([36:49]–[40:05])

• Question: Are there taxes if I withdraw from a Roth that’s had conversions in the past two years?
• Clarification: If you’re over 59.5, the five-year “conversion clock” is irrelevant. Original Roth/IRA has been open 20+ years—Lisa can withdraw tax-free.
• Quote:

  “You're wrong. You're okay.” — Joe [39:06]

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7. Contribution Rules for Passive Income & Roths

Lisa (San Diego): Rental Property Income & Roth 401(k)? ([45:34]–[46:54])

• Question: Can rental income qualify for Roth 401(k) contributions?
• Answer: No. Rental income is passive, not “earned income,” so it doesn’t count for IRA/401(k) eligibility.

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8. Rules of Thumb: Critiquing “Age Plus 20”

Listener Correction and Hosts’ Response ([40:11]–[45:31])

• Background: Listener provides context for Scott Cederberg’s “age plus 20” rule—use your age + 20 to determine percentage for pre-tax 401(k) contributions.
• Hosts’ Take: Still not a fan. It ignores the individual’s actual tax brackets before and after retirement, and oversimplifies essential planning.
• Quote:

  “Rule of 20. Still stupid.” — Joe [43:10]

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Notable Quotes

• Big Al on Roth Conversions and IRMAA:

  “I like the idea of continuing conversions after retirement because...the RMD with other income is going to push her past IRMAA.” [05:47]

• Joe on Conversion Risk:

  “There's a percentage that you're making a wrong move by doing a Roth conversion. But I'm willing to take that bet all day, every day, just to take the uncertainty off the table.” [16:15]

• Big Al to Aspiring Planners:

  “Put your money where your mouth is, Alex!” [21:22]

• Joe on Paying Taxes from IRA:

  “You’re paying tax to pay the tax to pay the tax. No!” [35:09]

• Joe, blunt (but correct) reassurance:

  “You're wrong. You're okay.” (To Lisa about Roth withdrawal taxation) [39:06]

• Joe on Simplistic Rules:

  “Rule of 20. Still stupid.” [43:10]

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Additional Listener Mail & Fun Moments

• Hosts banter over Seinfeld, the lack of violence in sitcoms vs. today’s shows, and the “red/green money” sales pitch.
• Multiple listeners describe their preferred drinks (sangria, vodka tonic, bourbon) and cars (Honda Civic, Toyota Sienna, Subaru Forester) in humorous introductions, a recurring tradition on YMYW.
• Playful jabs at each other’s reading abilities and the importance of spell-check (e.g., “hire able/hireable”).
• Hosts rib each other over listener emails: “I’d rather be called Joel than team.” [37:08]

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Timestamps for Major Segments

• Barry's Roth strategy: [00:55]–[07:07]
• Jerry & Elaine’s retirement and Roth timing: [07:17]–[16:21]
• Alex’s Roth conversion and career switch: [17:05]–[29:04]
• Mike in Philly on using IRA funds to pay conversion taxes: [29:04]–[35:46]
• Lisa’s Roth withdrawal five-year rule: [36:49]–[40:05]
• Listener correction on age-plus-20 rule: [40:11]–[45:31]
• Lisa (San Diego) on passive rental income and Roth 401(k): [45:34]–[46:54]
• General closing banter: [46:54]–[47:24]

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Final Thoughts

Joe and Big Al reiterate that personal finance is best navigated with custom analysis, careful tax planning, and skepticism toward blanket rules-of-thumb. The episode’s listener questions showcase real-world complexity, underscoring the need for thoughtful, individualized strategies—along with a sense of humor.

For those confused by Roth rules or charting a career in finance, the episode provides both technical answers and insider advice in an engaging and approachable format.

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Episode Resource Links

• Ultimate Guide to Roth IRAs
• Financial Blueprint/Assessment Tool

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End of Summary

Transcript

[A]

Join Big Al spitball on how to avoid screwing up the timing of your Roth conversions today on youn Money, you, wealth podcast number 550. Barry from New York is 62 and single and she's been diligently converting pre tax money each year for lifetime tax free Roth growth. Should she continue after she retires next year? Jerry and Elaine want to retire in the next six years and still leave the kids an inheritance. When should they start Roth conversions? Alex in Pennsylvania is a 31 year old software engineer. Should he convert his IRA to Roth all at plus how can he transition into a career as a financial planner? A clarification on the age plus 20 rule of thumb from one of our YouTube viewers is very unclarified for Joe and the fellows. Let Lisa in San Diego know whether she can use her rental real estate income to fund a Roth 401K. I'm executive producer Andi Last and here are the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Cllofine cpa.

[B]

Let's go to Barry from New York. Thank you for taking my question. I'm Barry, a single female, just turned 62 in August 2025 with plans to retire in December 2026 at the age of 63. I listen to Apple Podcasts, drive a 2018 Honda Civic EXT, and I love a great sangria. Here are my four things. Four things Big Al, you ready?

[C]

Okay, let's do it.

[B]

I'm primarily looking for your thoughts on a Roth conversion plan. My retirement savings are Roth IRAs of $450,000, ROL IRA of $400,000 and after tax of $100,000. I'm currently saving $35,000 a year in my Roth 401 plan to do that for 2025 and 2026. I'm also building up my after tax for conversion taxes. I currently earn $135,000 subject to federal and state income taxes and I'm also collecting a pension of $50,000 which is only subject to federal income tax. It has a diet cola. Aha. Diet cola.

[C]

Yay.

[B]

So that means a cost of living adjustment. But it's very light.

[C]

Very light. Apparently on the first 18,000 only. I don't know.

[B]

Diet cola. On the first 18,000 linked to inflation. My Social Security benefits will be around $50,000 at age 70. I currently spend 40,000 to $50,000 a year and plan to spend about $60,000 a year in retirement. I've been converting $20,000 per year in the 24% tax bracket. There's no New York State income taxes on the first $20,000 of IRA distributions. After 59.5, I have retiree health insurance through age 65 for $500 a year. At 65, I'll enroll in Medicare and the retiree plan will become secondary. I think I'll be able to file for SSA 44 in 2028 due to the retirement, which means I'll be constrained to 2028 AGI for my 2028 premiums. I'm considering large conversions after retirement and wondering the following. Should I continue to convert $20,000 per year through 2026? Should I continue converting after 2026? Should I convert above the $20,000 per year? Maybe up to IRMAA or the first year or higher? I appreciate you taking my question. Wow. I mean, this person does their homework.

[C]

They do. And first of all, I would say, Barry from New York, your situation looks fantastic. So you've done a good job and the retirement looks good. Now it's a matter of minimizing taxes. So what do you think, Joe? Does she keep doing the $20,000 conversion?

[B]

I don't think it hurts. She doesn't have. I mean, she's got $400,000 in a retirement account. She's 62 years old. So her income today is 100 plus the 60 or $50,000.

[C]

Yeah, it's.

[B]

So $185,000 as a single taxpayer. So she's doing $20,000 a year, the top of the 24% tax bracket.

[C]

It's 197.

[B]

Yeah, 197. So call it 200. So take the standard deduction. And then so she's going to the top of the 24. $20,000. So she's going to plan on retiring in 2026. At 2026, she still has the $50,000 pension. Should she convert in 2026? I would say. Why not? Let's see. Well, she's 62 years old. Let's say she's got $400,000 ten years from now. That's 800. Call it 900. I don't know what her RMVs are going to be. $30,000?

[C]

Yeah, 35. Something like that. On top of her other stuff. It, it definitely, definitely pushes her into the 22% bracket. I think, I think, Joe, at least if it were me, I probably wouldn't convert over the next two years just because of the higher salary. But 2027, if I'm retiring in December 2026, I think I'm converting in 2027 and 20, 28, 29, 30, 31. I think that's what I'm doing. Trying to stay in a slightly lower bracket, I think.

[B]

Yeah. Because, I mean, only if tax rates go up, because it looks like her RMD will be in the 22% tax bracket. She doesn't need the income. And she still has plenty of years to continue to convert $20,000 a year out or even to the top of the 22 max out that bracket. She could minimize her RMDs over that 10 year period or, you know, eight. Eight year period. Yeah, that's what I would do too.

[C]

Yeah. I, I like the idea of continuing conversions though, after retirement because just like you already said, between the pension and the Social Security and the rmd, she's going to be in a high enough bracket and in fact, the RMD income with the other two income is going to push her into the irmaa, past the IRMAA limits and she might want to stay out of that. So, yeah, I, I would, I would go ahead and do that, but probably start in 2027.

[B]

She doesn't pay state tax on the first $20,000 on distribution. I'm not familiar with that law in New York. I wonder if that is also true with conversions. Sometimes conversions are not necessarily classified as a distribution.

[C]

Yeah, I don't know. And I hadn't heard of that rule either. And that would be a reason potentially to not convert all of it because, you know, the first 20 grand's tax free in the state.

[B]

There's different ways you want to convert 20,000 because you're not paying tax on it. Well, I'd want a higher bracket.

[C]

Yeah. I want to convert enough to make sure it was always below 20,000, I guess is what I'm saying when I hit RMDs.

[B]

Yeah, right, right, right, right. I think you could convert enough out and your RMDs are going to be under $20,000 because if she doesn't do anything, her RMDs are probably 35, you know, given a pretty aggressive growth rate.

[C]

Yep, me too.

[B]

All right, Cool. Barry. It's kind of a cool name.

[C]

Yeah. Like it?

[A]

It's like Andy.

[B]

Yeah.

[C]

Yes.

[B]

Let's go to Jerry and Elaine. Oh, Lil Seinfeld.

[C]

Yeah.

[A]

Did you watch that show, Joe?

[B]

I did watch that show.

[A]

You liked it?

[B]

Yeah.

[A]

I would think there wouldn't be enough violence for you.

[B]

I mean, I haven't, I don't watch a lot of comedies today, but I think back then, yeah, the mood just.

[A]

Seems better for violence. Now than it did back then.

[B]

I don't know. Yeah. I don't know. It's like, I haven't watched, like, a comedy movie, rom com, anything. I can't tell you how long. Wow.

[C]

You used to be, like, I don't know, more carefree. Huh. And you could get into that. And now it's like. It's like. So my son, Ryan, goes to the gym all the time and he listens to metal, right? And he tells me. Because that's how you get into it. Maybe that. So you like the violent shows? Because. I don't know why, but I like drama, I guess.

[B]

I mean, not all the shows I watch are crazy violence, but I do.

[A]

Name one that doesn't, Joe.

[B]

Huh?

[A]

Name a show that you watch that doesn't have violence.

[B]

Landman. Landman's one of my favorite shows that has zero violence.

[A]

Cool. Excellent.

[C]

Okay.

[B]

Well, I mean, there's a couple people died. Wow. They didn't get. And I guess there was a few gunshots, a few, you know, but it wasn't. It's not.

[A]

I don't think anybody ever got shot on Seinfeld. I could be wrong, but.

[B]

Yeah, very true. Very true. Yeah. No, I'd like to. I've seen a few. Seen a few of those episodes that. In Friends, right? Wasn't it Seinfeld and Friends and then, like, Melrose Place or something? That was in, like, the Thursday night lineup?

[A]

Might have been.

[C]

Yeah, I. Yeah, I don't. Yeah, I remember Friends and Seinfeld and before that, Cheers. I think those were all Thursday shows, if I recall.

[B]

Oh, yeah.

[A]

Yeah. I never got into the Melrose place or the 90210 or any of that good stuff that just.

[C]

Me neither. I was. You were younger, Joe, so maybe you got into that.

[B]

Oh, yeah. Brandon, Dylan, come on.

[C]

Is that what brought you out to California?

[B]

Yeah, exactly.

[C]

Okay.

[B]

I wanted that zip so bad. All right, let's go back to Jerry and Elaine. Can I retire in six years or can I. Yes. At age 62 and still have money to leave to my kids. All right, and when should I start? Roth conversions. Ages me, 56, wife 55. We currently spend about $120,000 a year. It will likely stay the same even after our mortgage is paid off. $2,000 a month. Our yearly income is $300,000. Current savings, a couple million bucks. $1,900,000 in deferred and $150,000 in Roth cash is $150,000. Alrighty. So far, so good. Jerry and Elaine saving $80,000 a year, $40,000 into the 401 and $40,000 to a brokerage account in a high yield savings account until retirement. Then it will drop down about $40,000 until my wife retires at 65. Home mortgage is $200,000. At 2.75, it's worth $850,000. It will be paid off in eight years. Wife will continue to work until 65 to cover health insurance. Combined Social Security at age 71. 70 is $8,500 a month. I enjoy a little vodka tonic and my wife drinks white wine. I don't know enough about wine to describe it in any more detail than that. It is white and it comes out of a wine bottle.

[C]

Okay. Usually it's more clear, but we'll go with that. Very good.

[B]

I started listening to the show approximately two months ago and it came across as a podcast suggestion. I greatly enjoyed the financial information in your self deprecating humor.

[A]

All right, good job on deprecating. Joe.

[C]

Yeah, that's a big word.

[B]

See, I could spell it. I mean, I couldn't spell it.

[C]

You can say it there. You can read it.

[B]

You can say it. Yeah, I need spell check for that one.

[C]

Yeah, right, right.

[B]

All right, so. Well, congratulations. You've done a hell of a job. And the question was. I totally forgot.

[C]

Well, the question was, can I retire in six years at age 62 and still have money to leave to my kids? So, Joe.

[B]

$120,000 a year. They have two and a half million dollars saving $80,000 a year. And she's gonna still work.

[C]

She'll keep working. So I just ran six years only. I just said six years. Two and a half million, 6%. 80,000 add per year, they end up about 3.7 million. Even if wife isn't working. I just took three and a half percent distribution rate at age whatever, $62,000. I get $130,000 available. He wants to spend $120,000. That's before Social Security and that's without her salary. I think this whole thing looks amazing. So I'm not concerned at all about that.

[A]

So when should they convert to Roth? That's the next question they ask.

[B]

Well, they're making $300,000 a year. I don't know, is it split evenly? 150,000. $150,000. At $150,000, they're in the 22% tax bracket. They got a ton of money sitting in deferred accounts. She's going to continue to work, though. And I'm Guessing that her salary is probably enough to maintain their living expenses.

[C]

I'm thinking that, too. Yeah.

[B]

If I was guessing, man. So that $2.2 million in retirement accounts is probably not going to be touched until she retires.

[C]

Probably. So there's many more years of growth. Yep.

[B]

There's many more years of growth, and there's a ton of savings going into that account. Yeah. The answer is that they could be pretty giant, and your RMDs are probably going to pop you in a bracket that you're not going to enjoy. So trying to even out that for sure without knowing more specifics on her income, what tax rates are going to be. Yes. I think you should be thinking about a conversion strategy when you think of.

[C]

It this way, Joe, she's at 55 and RMD age is 75. At that age, 20 years. 20 years. Rule of 72, 7%. It could double twice, and that's without even adding more to it. So that it could be 4 million to 8 million.

[B]

Yeah.

[C]

Right. And so that could be a pretty large rmd. So I'd be. I'd be trying to convert as much as I could. The challenge is to have enough money to pay the taxes, but right now that they probably have enough income to do that, and then after Jerry retires, maybe there's a little bit less income, but they'll be in a lower bracket, and I think they continue. So, yeah, I think this is a perfect case for a textbook case for doing Roth conversions.

[B]

Yep. You know, if you think about it, would you tell them not to save as much and pay some tax on the conversion?

[C]

Maybe only because you got 2 million in tax deferred at age 55. That's a lot before you have to start pulling that out.

[B]

So he's got $40,000 that's going into the brokerage. How much money does he have in the brokerage account? He's got 150,000 in a high Yield savings account. Or is that his brokerage account?

[A]

He says he's saving $40,000 a year to his brokerage, but he doesn't tell us how much is in there.

[C]

Yeah. So we're assuming it's not very much, but maybe there's a bunch. But he didn't specifically.

[B]

He's got $150,000 in cash. And is he saving that $40,000 per year into that cash account?

[C]

I'm going to presume there's not a big brokerage account because it's mostly in retirement. That would be the only caveat here, is you Got to have enough money to be able to pay the tax on the conversion. But currently there's seems like if they're really spending 120, there's plenty of income, plenty of cash, current cash to go ahead and pay the taxes. And they'll be in the 24% bracket, which is, which is still a very good bracket. If you, if you fast forward 20 years and their, their RMDs are 300,000 plus Social Security.

[B]

Right, right, right.

[C]

You got to think of it that way. Yeah, yeah.

[B]

If you think tax rates are going to stay the same or go up in 20 years, then you just take the uncertainty of tax off the table and get that into a Roth and it's going to compound forever tax free. And they got so much time too. And the compounding effect of that tax free, getting it out of the retirement account, that's going to compound 100% ordinary income. You're making assumptions here with any conversion strategy. We talk about converting all the time, but it's like the assumption is if you're going to be in the same bracket or higher than convert, but we don't know what tax rates are going to do. They could go lower. It could be a flat tax. It could be. There's multiple different scenarios down the road that could. There's a percentage that you're making a wrong move by doing a Roth conversion. But I'm willing to take that bet all day, every day, just to take the uncertainty off the table.

[C]

Yep, makes sense.

[A]

If you're wrestling with Roth conversion timing like Barry and Jerry and Elaine and Alex and Mike. Coming up, save yourself some trouble. Grab our ultimate guide to Roth IRAs. It's got a side by side look at Roth versus traditional IRAs so that you know whether it makes sense to stay traditional or go Roth. It's got rules on Roth contribution limits and withdrawals. A walkthrough of the backdoor Roth conversion strategy, the differences between Roth IRAs and Roth 401ks, and a deep dive into how you build tax diversification so you're not putting all of your eggs into one tax basket. Click or tap the link in the episode description. Download the guide for free and keep it open while we finish the rest of the episode so you too can make your next Roth move with conviction.

[B]

We got Alex in Pennsylvania. Hello, Joe, Big Al. I'm a software engineer making about $150,000 a year and I'm 31 years old. All right, Alex. My home is basically paid off and I have about $250,000 in retirement debt split is one third Roth and the rest pre tax. I just started maxing out my Roth and I'm planning on converting my pre tax IRA of $57,000 into the Roth as well. My goal is to have a 5050 split. Would you go ahead and do that conversion or would you just let the new contributions keep up to the Roth to the pre tax? My employer contributes 8% a year. So once the two are balanced, I'm going to lower my Roth to 8% and start working on my brokerage side. Question. How would you recommend going about transitioning into a career working at a fiduciary financial planning firm? I have time to do all the learning, but curious what the minimum requirement is and what is the recommended to be. Hire able.

[A]

Hireable.

[B]

Yeah, hireable. You got to learn how to read.

[C]

Apparently that's not a requirement.

[A]

Yeah.

[B]

Not a qualification.

[A]

You have to be able to do math.

[B]

Hire, able, hireable, whatever. You put a dash in there kind of threw me off.

[C]

It does say hire able. Usually that's a single word, but whatever.

[B]

Hireable. All right.

[C]

Yeah. Right.

[B]

Okay, so let's answer. Well, I'm not sure if I understand why he wants a 5050 split. I think you probably want to do a little bit more math. But I think if that's where he's going, it's fine. It's better than 100% all pre tax. But you probably want to look at some forecasting here again to make probably better decisions. Just kind of a rule of thumb of 50. 50.

[C]

Yes, I agree with that. And whether he should convert the pre tax IRA $57,000 at $150,000 in income. Yeah, I would be inclined to do that. And I'll tell you why. It's because the top of the 24% bracket single taxpayer is about $200,000 plus you get the standard of call it 15. So you can make 215, which would be inclusive of your Roth conversion and your salary and still say in that 24% bracket. I'm thinking at age 31, your salary is probably going to only go up from there, probably be in higher brackets later. So it seems like it'd be a good time just to go ahead and do it. So that's probably how I might think about it.

[B]

I don't know. I would slowly do this. That's 20 grand in tax.

[C]

Yeah. Well, we don't know what his brokerage account or cash reserves are.

[B]

He's making $150,000 a year. He's got $250,000 in retirement at $31,000, which is a hell of a job.

[C]

It is. It's amazing, right?

[B]

So you got $250,000. I would hate you like, the compounding effect. I would do conversions, but I don't know if I would bite the bullet all at once at. At that age, at 31, making $150,000 a year and cutting a $20,000 check to the IRS. I think if you do the math, it's going to work out, as the CPA is just illustrated. But I think real life, I don't know. That would be. That would be hard. That's. I mean, that. Those are a lot of Coors Lights. Those are a lot of rounds of golf. Those are a lot of different things that you could potentially still have a little bit of fun with. It's not like he's lacking retirement savings, as I think as he continues to grow his overall portfolio, I mean, at 31 years old, you could slowly get a lot of that out and not have such a huge tax bite. But I think if you ran the numbers, it makes sense to convert it all and pay the tax and move on. But I don't know, just cutting that check to the IRS at 31 that large.

[C]

You bring up a good point, and I don't necessarily disagree with that. It kind of depends upon if he's got the resources to pay the tax and how he feels about it. If he wants to be an advisor and he likes what we talk about with Roth conversions. Put your money where your mouth is and go ahead and do it.

[B]

But, wow, look at that.

[C]

How about. How about that?

[B]

Put your money where your mouth is, Alex.

[C]

Yeah.

[B]

All right, so let's give them. How do you start your career in this. In this crazy field of financial planning?

[C]

Yeah.

[B]

What would your suggestion be? Big Alone.

[C]

Me? Well, I think I would start thinking about the gold standard of financial advisors, which is a certified financial planner. So I would take the required courses that you need to take to take the exam. I take the review course, and I would try to pass the exam. In the meantime, I would just start talking to as many friends as I had or friends of friends that are in the industry and start talking to different people, different firms, different approaches. How did people get hired as advisors? How do you get started? I mean, in our firm, you kind of need to be a CFP or a CFP candidate, first of all, and have an interest in financial planning. And typically in a firm like ours, you start out in the financial planning department, and it may take years to become an advisor, but every firm's a little bit different. So I think I would just start talking to people and see what's going to be the best path for you.

[A]

You also need to be really ethical. I think that's something that doesn't get discussed a lot. In order to have that certified financial planning certification and to have that gold standard, you have to have the ethics to actually be willing to do it.

[C]

Yeah, that's a good point too. What do you have to add, Joe?

[B]

Well, If I was 31, looking to make a career change and getting into this field, there's a lot of different avenues that people can go down. Unfortunately, the public and people that interview a lot of you walk into a firm and it's like, all right, well, yeah, we're all financial advisors. And then you start and next thing you know, you're like an insurance salesman, right? It's like, oh my God, what did I get myself in? Everyone looks the part, they act apart, they say the right things and hey, we're helping all these people. But then all of a sudden you got sales quotas. They're. There's no help on getting in front of clients to actually help them with their financial goals. And you're not getting paid all that much. And so you have to sell product to make a living. That's kind of a lot of the industry still. So I would interview. What I would do is I would go to like napa.com or.org, the National association of Personal Financial Advisors. So that's a fee only organization. Or those are all advisory firms or individual advisors in the fee only world. So you don't sell product, you're acting very ethical, fiduciary standard. And most of those individuals, or a lot of them have the certified financial planner designation. I would start looking in Pennsylvania or wherever you live, Alex, close to your house to say, all right, here, can I come in and talk to the principal of that firm for 15 minutes, buy them a cup of coffee or lunch or whatever the case may be. You're right. I think there's a lot of different firms with a lot of different flavors that will help younger advisors get into the career. Some will not. So you just have to identify. All right, if I really like financial planning, that's great. And I really like to help people and I love to get into the numbers and I like to work with clients and everything else, but coming into the business with no clients, it's like, all right, well, are they going to help Me get clients are they already have a bunch of clients that I can work with another advisor and help? Is there a training program? I'm going to come in cold. How do I learn the craft? But you're right, I would start getting my certified financial planner designation. As long as you have a bachelor's degree, you can go to the CFP board and get the curriculum. That's where I would start. It might take you a year or two to get through all of the testing that needs to be done. So you might want to start investigating that now. And then as you're studying for that exam, talk to as many advisory firms in the neighborhood as you possibly can. I would start with RIAs, registered investment advisors. So you're not going to get stuck in saying, all right, well here you got quotas or you got to sell this or that. Maybe you start out as a pair planner. Maybe you start as a client service associate. Client service associate will help with paperwork and understand and learn how to work with the custodians like Charles Schwab or Fidelity. And then you're working with the advisor and you're understanding account types like Roth IRAs, 401s to trust accounts and then understanding like distributions and cash management. And then from there as you're learning the basics, from there as you're still studying, then maybe you move up to a paraplanner and then from there a full financial planner and then they're a client facing advisor. So I mean there's all sorts of different career paths that you could potentially take. But I would do the research first to look at where the firms are in your neighborhood and then, you know, start the studying because you can still work at your existing job and study for the cfp so you still have cash or paycheck coming in and then meet the people that will take care of you and take care of clients. Because it's all about culture too. I mean, this is a challenging career in the beginning and so you want to make sure that you have the support you need to make sure that you're successful. So when I got in the business, I didn't know what the hell I was doing. It was like I thought, all right, I'm going to start helping people. This is going to be great. I'm going to learn all sorts of stuff about the markets and taxes and you know, all right, here you go, here's the white pages and here's the telephone, by the way, get your friends and family in here and start selling a product. But times have Changed quite a bit. But still, that's still a big part of the overall business. I mean, the training programs are almost non existent. The big wirehouses, Merrill Lynch's of the world, ubs, Wells Fargo, they would have these broker training programs, you know, so you could get hired right out of college. It was a lot of hard work, but you could actually get in the door there. A lot of people didn't necessarily make it, but just because they didn't get in front of enough people to get us clients and there are certain quotas that those firms have, but those are non existent. So then now it's like, all right, well how do you get in? And then you look at the industry itself, is that it's an aging industry. I would say, what, 30% of advisors are over the age of 65 and looking to retire at some point. So it's a phenomenal career, it's a phenomenal industry if you really want to help people in solve complex problems. But the problem with the industry is that everyone kind of looks and feels the same to the, to the consumer until they get into, you know, the process. And then also, you know, from someone coming into the industry as an advisor, all the offices and everyone looks the same and feels the same and it's like, all right, great. And then you realize, well, wait a minute, I'm not doing financial planning at all. I'm, I'm selling stuff to make a living. But I don't know, that's my two cents. Maybe that was a little bit more than two cents.

[A]

That was like a buck fifty.

[C]

I was trying to jot it all down. I got six pages.

[B]

All right, there you go. All right, let's go to Mike in the suburbs of Philly, typing slowly for Joe. Love it. Thank you for typing slowly, Mike. You have spitballed for me in the past and I have another specific question I wanted to kick around. Me, 58 and a half, wife 54, total assets tax deferred, $2,600,000 tax free, $750,000. And we got a brokerage account of $850,000. I'm still working with plans to retire in the next year or so. And by the way, I'm like reading Stellar right now.

[C]

I know, you're like perfect.

[B]

I mean, I'm.

[A]

As soon as somebody challenges you, you're audible.

[B]

I'm going to start reading books even though.

[C]

Yeah, you should. You only missed one word so far. That was Dr. Go on.

[B]

Yeah. I currently have $2 million in tax deferred IRA and I'm curious on your thoughts on how to execute my Roth conversions. I've been converting over $50,000 a year, but I'm beginning to wonder if there's enough Runway to get enough of my money converted before taxes start to punish me. My current expected, my current expectation is that taxes will be significantly higher in the future to cover the debt burden that the country has accumulated. Got it. Okay, two questions that Mike from Philly has. Would you ever consider using some of the conversion dollars to pay the tax? Is there a rule of thumb here? All right. Would you ever consider spending, withdrawing early from the deferred account, then required to blunt the future tax consequence in an effort to draw the balance down and smooth the taxes out over time? Take it easy on me.

[C]

We're easy on people. Are we?

[B]

Totally. I'm driving a Toyota Sienna till it dies, and I currently don't drink. That's why he's typing so slowly. But we'll consider taking it back up depending on the answers of these questions. Best financial podcast running. Wow.

[C]

Oh, that's nice.

[B]

Wonder what other financial podcasts he listens to.

[A]

Well, the ones I'm running.

[C]

I love it when people say, it's my favorite financial podcast. Like, the bar isn't too high.

[B]

I mean, what do they listen to? About eight of them. The other ones are.

[C]

I'm waiting for the day when someone says, this is my all time favorite podcast. Not financial, just podcast. But that has.

[B]

That will never be the day. Never be the day. All right, so he's got $2.5 million in a retirement account. He's married. He's only 58. His wife's 54. So $2,600,000. So he's like, all right, does it ever make sense to cover the taxes? With the conversion itself, yes, but in very few circumstances is what I'm going to throw out there.

[C]

Yeah. So the word that came to my mind is rarely, but not never. Rarely. I think it can make sense is if you have a really large IRA or 401k balance without any other assets outside of retirement. Right. And there's no way to pay the tax, but you're, you're going to be in the highest of brackets because the RMD and you're in lower brackets right now. Yeah, I'm okay with that.

[B]

But in this case, like, I mean, if you put it in terms like this, let's say you're in the 24% tax bracket, but when the RMD hits, you're going to be in the 32 or 35.

[C]

Yeah. Let's say that what you put in your air, your 401k just went through Apple stock. Let's say it went through the moon and you got 10 million. Right. Or whatever. The numbers, we've seen crazy numbers.

[B]

Sure. $2.5 million. I don't know. I don't think it's worth enough to pay the tax out of the retirement account to do the conversion in that amount. Because he's got plenty of time to take distributions. Because the second question he has is like, hey, would you ever consider spending or withdrawing early from the deferred account than required? Absolutely.

[C]

Yeah, you bet.

[B]

So you either take the distribution from it or you convert it before your required distribution. So you look at today, I mean, you could start doing conversions today, Mike.

[C]

Right.

[B]

I don't know how much his income is.

[C]

It depends on his income. Right.

[B]

But he could. It sounds like his thought process was, I'm going to wait and defer this until I'm required to take distributions. Or does it make sense to even out the taxes over the long term? Yeah. So it's all about your distribution strategy of how much money that you're taking out of your retirement account, your Roth account and your brokerage account. You're either taking the dollars out to spend and paying the tax or you're taking the dollars out and converting them into a Roth if you don't necessarily need to spend them. But yeah, you absolutely want to get the money out of there either way you're converting or spending it to even out those taxes over the long term to keep that RMD as low as you can.

[C]

Yeah. And in this case he's got 850,000, so there's a lot to work with in terms of paying taxes. I'd actually rather get more money into the Roth. Right. And pay the tax with non qualified money if I have a choice, which is the case here. But Joe, the question's a good one because I mean, he's 58, she's 54. So this is between the two of them almost 20 years between now and when they have to take required minimum distributions and 7% rate of return. The 2.2.6 could double twice. It could be $10 million.

[B]

It could be a big number.

[C]

It could be 400,000 as an RMD. So the question is a good one and appropriate. And yeah, you want to get as much converted as you possibly can, but you also can use that money to live off of as well. It's kind of either or.

[B]

Yeah. There's so many Unknowns. Is he retired? What is his fixed income? What tax bracket is he in today? You know, what forecast you want?

[C]

Yeah, there's a lot we don't know.

[B]

But, but paying taxes out of the retirement account, do you want to do that? Rarely.

[C]

Yeah. When there's, when there's no other choice and you got a giant 401 or.

[B]

I. I'd much rather take debt and pay the taxes out of a home equity line than than pay the tax out of the retirement account because you're taking money out of the retirement account to pay the tax. To pay the tax. So you're paying tax to pay the tax. To pay the tax. No. Right. You see that cycle there? So you rarely want to do that. You're, you want to leverage the amount of money that goes into and have that dollars that is already after tax to pay it.

[C]

But be careful with that strategy. You don't want to get too much debt.

[B]

No. Well, you got to be responsible in moderation, the appropriate planning and.

[C]

That's right.

[B]

Talk to your financial advisor.

[C]

Got it.

[B]

But that was my opinion. I would take out debt versus taking money out of the retirement. Or don't do it at all.

[C]

Or don't do it. Yeah. If you didn't have any choice.

[B]

Yeah.

[C]

Okay.

[A]

Think you're actually ready to retire or are you just ready to quit? Watch 6 Signs. You truly have enough for retirement. This week on a brand new episode of YMYW tv. Do you really know your retirement number? Do you have a withdrawal strategy that'll last and the right timing for Social Security? Are your health care costs planned for your budget realistic? And are you mentally ready to make the leap? Joe and Big Al help you find the answers to these questions and they'll show you how tax planning, portfolio design, RMDs and an estate plan all factor in. Click or tap the link in the episode description to watch YMYW TV and to pressure test yourself against all six signs. Take the next step. Run your numbers with our financial blueprint. It's free, self guided and walks you through your savings, spending, taxes and withdrawals so you know where you stand and what to do next. You'll find both links in the episode description. Then why not share the show and the financial blueprint with a friend?

[B]

Okay, here we go. We got Omaha, Nebraska. Lisa. Well, hello Andy, Al and team.

[C]

Are you team?

[A]

Wow, reduced to team team.

[C]

So that's you and Aaron.

[B]

Oh my gosh.

[A]

This is high five.

[C]

This is already starting out well.

[B]

I've never, never been so hurt in my Life.

[C]

Remember when people, people used to call you Joel?

[B]

Joel?

[C]

Yeah.

[B]

I'd much rather be called Joel than team.

[A]

I don't know if we've come across it yet, but there's somebody in here in these 50 pages of email that we have that called you John. That's one I haven't seen before. It said John and Big Al.

[B]

All right. Oh, well, okay, Johnny.

[C]

Yeah.

[B]

All right. And team Perfect. I have $50,000 in an old 401 or old Roth. $10,000 in contributions 20 plus years ago. In the past two years, I did some Roth conversions. $42,000 each year. I'm 60 years old and want some cash. How do distributions work? Based on my understanding of Roth, of Roth withdrawals, orders of operation, of the five year rule on conversions, it sounds like a withdrawal above $10,000 would be taxable. That seems a little weird, as I could have withdrawn that $50,000 tax free had I not done the conversion. Please tell me I'm wrong. I Drive a 2018 Subaru Forester, have two dogs and 400 cats. I figured.

[A]

Wow, Joe shoots shots fired there.

[C]

I think the word is a. I have a cat. But you read 400, so that works.

[B]

I'll drink anything but prefer bourbon. I've been a fan of y' all for seven years. I'm grateful for what you do. Thank you for several years.

[C]

You caught your own mistake.

[B]

Okay, she's grateful for several years.

[C]

It's like seven.

[A]

That's more than five.

[B]

Hey, Andy. Allentine. All right, let's see. Okay, no. So she's looking at the five year rule. He's 60 years old. She did the conversions, everything's fine.

[C]

I agree.

[B]

So you're wrong. You're okay.

[C]

You get to take the money out. It's all tax free. So basically a couple five year clocks, it's confusing. I understand that, but. So the first clock is that you got start a Roth. Right. And so once you start a Roth the year you started, contribution or conversion, it goes back to January 1st of that year. That starts the clock. Then you got to wait five years or 59 and a half, whichever is longer, to pull that money out. Right. So that's the. That's the first rule. And yeah, she's passed that. She did this decade a couple decades ago, so no problem. Right. And then once you do a conversion, if you're under 59 and a half, those conversions have their own special rule that you got to wait five years.

[B]

Or 59 and a half.

[C]

Or 59 and half. Right, exactly. She's 60. So that second five year rule doesn't apply anymore. So yeah, take away Ross as much as you want, there's no taxation.

[B]

All right, let's go to Matt. We have another YouTube someone that wants to argue with us.

[A]

Yes, exactly.

[B]

Got it.

[C]

I would just say comment, not necessarily arguing.

[A]

Okay, he's just filling you in.

[B]

Got it. Scott Cederberg's early research on pre tax contribution rates was related to the risk of tax rate changes. I don't know who Scott Cederberg is.

[A]

He's the one that came up with the age plus 20 rule.

[B]

When did we ever talk about the.

[A]

Age plus 20 rule in podcast number 496? So it was a while ago. What are we on now, like 550 or something like that?

[C]

It only feels like it.

[B]

Okay, so the age plus 20 rule of thumb is the max contribution to a pre tax retirement plan. The research shows that regardless of country, as you approach retirement and get older, the risk of drastic tax rate changes decreases since the time horizon is shorter. Cederberg said has said in interviews that people in the US in the 10 and 12% tax bracket should probably be 100% Roth due to historical low rates, obviously with the caveat that it's not specific rate or investment advice.

[A]

So back in 496, somebody had asked, what do you guys think of the age plus 20 rule? And Joe, you said, I just think that it's really bad. And Al said, I don't know who would have come up with that. So now that you've got a little.

[B]

Bit more information, what is the age plus 20 rule? Though? I don't even know what it means. So you take your age plus 20 then. So you get a number. What does that number represent?

[A]

So if you're at age 54, allocate your 401k contributions as 74% in regular, 26% in Roth and adjust each year. The basic idea is that as you get further along in your career, you need more tax savings rather than gaming it out on a spreadsheet.

[B]

Okay, we should have prefaced this what the rule of 20 is. So the rule of 20 is saying how much money you should have in tax free accounts versus tax deferred accounts.

[A]

Correct.

[C]

I think that's the contribution. Right, the contribution, current year contribution.

[A]

As he says, the max contribution is.

[B]

Roth or the lower number is Roth.

[C]

The higher number is pre tax or no. Yeah, pre tax.

[A]

401 contributions would be 74% if you're 54 and 26% to Roth and then adjust Each year.

[C]

I guess the theory, Joe, is that you're closer to retirement, so the risk of tax changes is lower than maybe if you were in your 20s. I guess that's the. So you. And I don't particularly care for that because you're completely ignoring. The most important thing is like, what tax bracket are you in today versus what tax bracket are you going to be in when your required minimum distrib kick in? That's really helps you determine what you should contribute to the Roth side or not really.

[B]

Yeah. Rule of 20. Still stupid.

[C]

The rule of. It's the age plus 2020 rule.

[B]

Yeah, yeah, yeah. All right.

[C]

You don't like it. Still no.

[A]

Still not a fan of rules of thumb.

[B]

Still don't like that one. I don't know who makes it up. I guess Scott.

[A]

Scott Cedarberg and David Brown, I believe, was the.

[B]

What is Scott Cedarberg? What I mean, is this. Is he a Ph. Steve from Yale or is this guy. I don't know. What's the source? I've never heard of Scott Cederberg.

[A]

Scott Cederberg is a professor of finance and the Thomas C. Moses Endowed Chair of Finance at the Eller College of Management, University of Arizona.

[B]

Ah, wildcat.

[A]

That's how you're going to make your decision on how he is financially?

[B]

No, I'm sure he's a really smart guy and they probably did a lot of different research there, but I don't know how you would even. That's just. Well, I suppose if you're in the 10 or 12% tax bracket, 100% Roth. If you're in the 22 or 24% tax bracket, you probably want to be diversified. Maybe this rule of thumb kind of helps people at least start moving money into Roth, because most people don't have a lot of money in a Roth. They don't understand it. They don't think they qualify or, you know, they just kind of set and forget it in the traditional. So I don't know. I guess it's fine if you could get people to move more diversified. From a tax perspective, I'm all for that, but I don't know that rule of thumb. Just.

[C]

Well, remember how it used to be 100 minus your age and then those are annuity salesmen. I know, but it was out there a lot. Right? So 100 minus. So let's say you're 60. So 100 minus your age is 40. So you're supposed to be 40% in stocks and 60% in bonds. 70. Then it's 30. 70 and then, well, now 70%, it's.

[B]

Safe money, red money and green money. Yeah, that's what they say red money is. Yeah, that's, that's, that's fixed annuity. Green money is loaded. Mutual funds.

[C]

Got it. And, and then remember as we started living longer, they changed it to 120. Minus 120.

[B]

Yeah. Uhhuh.

[C]

And I remember commenting with you probably 10, 15 years ago and we said, I, I guess if you don't do any financial planning at all, at least it's something, but it's not what we'd recommend.

[B]

Yeah, right.

[C]

And maybe this is similar.

[B]

Yeah. All right, we got Lisa. Lisa from San Diego. I'm 65 years old and retired. I have a rental property in Missouri being managed by a property manager. Am I qualified to open up a Roth 401k for myself? The answer, if that's your only income. The answer is no, Lisa.

[C]

That's correct. You have to have earned income to open up a 401. Earned income being if it's your own 401, it needs to be earned income from your own business. And yes, this is a business, but the income from this is considered passive income. It's rental property. It's not earned income. You don't pay Social Security taxes on it. So you're not allowed to do a retirement plan on this per se. And that's really. Joe, that's kind of the dividing line. If you have, if you're paying Social Security taxes means you're employed probably. And if your employer has a 401k, you're eligible. If you have your own business, you're paying self employment taxes. That's the same as earned income. If you're paying self employment taxes or Social Security, you can do the 401. You can also do IRAs, but you have to have earned income to do that and rental property income doesn't count.

[B]

Got it. Very good. Thank you, Al.

[C]

I thought you were going to say I could have said that in one sentence and it was perfect.

[B]

You stretched that thing out.

[C]

I said it in about 25 sentences.

[B]

It's perfect. All right, buddy, well have fun in Hawaii and then I will. Yeah, I will see you in the Big Apple here.

[C]

That sounds good.

[B]

All right, Andy, thank you very much. Good day, mate.

[A]

Thank you. G'.

[B]

Day. All right, we'll see you next time, folks. Show us called you'd money you all.

[A]

Next week on ymyw. Should you take money from your IRA or taxable accounts? First join Big Al Spitball on the sequence of retirement withdrawals for retired G Man and Nurse Ratched, plus whether how much to convert to Roth and when is really the most important question for Mike and Carole in Florida. What Mike in Utah should do with his 90 year old mom's big annuity and the pros, cons and and cons of gifting appreciated assets to Doc McMuffin's parents. Join us, won't you please? Your Money, you, Wealth is your podcast. We just make it for you. Your questions, your honest Reviews and your YouTube comments keep us making fun of finance. Thanks for being a part of ymyw. And look, if you've saved millions for retirement, you know money management isn't a hobby, it's a full time job. Or it should be. Tax laws, market volatility, planning for the long term. This is complex stuff and there is no one size fits all solution. Let Joe and Big Al's experienced team of professionals at Pure Financial Advisors give you more than just a spitball. A free Financial Assessment with Pure is a comprehensive review of your taxes, investments and your plan for retirement income designed to protect and maintain your wealth for the long run. Meet in person at one of our 14 nationwide offices or on Zoom. Whatever works, works best for you. Book your free assessment now. Click or tap the link in the episode description or call 888-994-6257 and tell him you heard about it on the youe Money, you, Wealth podcast. Pure Financial Advisors is a registered Investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcasts content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.