Your Money, Your Wealth – Episode 556

Title: Roth Conversions vs. 0% Capital Gains Rate: a Retirement Tax Trap?
Date: November 18, 2025
Hosts: Joe Anderson, CFP®, & Alan “Big Al” Clopine, CPA

Episode Overview

In episode #556, Joe and Big Al tackle real-life retirement tax planning dilemmas with their signature wit and straight talk. The main theme centers around the delicate tax balancing act between making Roth IRA conversions and taking advantage of the 0% long-term capital gains tax rate. They answer listener questions about trusting financial advisors, Roth conversion strategies (and whether to convert both spouses’ IRAs), the actual mechanics of spending from a Roth, and what to do with $3.5 million in your 50s. Throughout, they highlight potential “tax traps” waiting in retirement, bringing technical expertise to bear in practical, actionable ways.

Key Discussion Points & Insights

1. Joe Mama in Virginia: Roth Conversions vs. 0% Cap Gains

• Scenario:
  Joe and his wife (ages 57 & 58, both retired) have $4M in investments, with $2M in brokerage, $1.6M in traditional IRA, and $150K in Roth. Annual spending is $216,000, with income sources including pension, rental, and dividends.
• Current Plan: Avoids using retirement accounts to maintain a $95K AGI, ensuring $30K in annual capital gains are taxed at 0%. Hesitant to do Roth conversions or withdraw from 401(k) due to "losing" the 0% cap gains bracket.
• Concerns: His advisor is nudging him toward Roth conversions and more assets under advisory, but Joe Mama is wary of increased taxes from losing the 0% capital gains benefit.

Hosts’ Analysis & Spitball

• High Burn Rate Warning:
  “That’s a 5% distribution rate at 57, Joe Mama, you’re right. I think that’s a little rich for your age." – Big Al (05:22)
• Understanding the 'Tax Trap':
  “When you do a Roth conversion and push up your ordinary income, you push capital gains out of the 0% rate and into the 15%. We’ve seen so many tax projections where people are in a 27% bracket and don’t even realize it.” – Big Al (06:05)
• Strategy Recommendations:
  • Short-Term: Consider a 2-3 year window of large Roth conversions to the top of the 22% or even 24% bracket ($300K/year), even if it means forgoing the 0% cap gain temporarily.
  • Medium-Term: After conversions, revert to the 0% capital gains harvesting.
  • Tax Diversification Matters: Early Roth conversions significantly boost future flexibility and reduce unknown tax risks:
    “The sooner you can get money in Roth, the sooner you take tax uncertainty off the table.” – Joe (08:42)
  • Tax Loss Harvesting: Consider more active tax management in the brokerage account, including harvesting losses to offset gains.
  • SS Claiming Age: Don’t rush; waiting till FRA or later makes sense with this asset base.

Memorable Moments

• “There’s no way he’s going to do that.” – Joe, on pausing all brokerage sales for a couple years to maximize Roth conversions (10:36)
• “It’s not the RMDs, it’s the high spending that’s the issue.” – Joe (07:30)

2. David & Shannon: Which Spouse to Convert? And the IRS Rule 55

• Scenario: David and Shannon, early retirees, have only converted David’s IRA for simplicity. David clarifies a subtlety on the IRS Rule 55 (penalty-free withdrawals for those who retire at 55): It applies if you turn 55 in the same calendar year you retire.
• Question: Should Roth conversions be done in both spouses’ IRAs?

Hosts’ Answer

• Age is the Key Factor: If one spouse is older, convert from their IRA first (due to earlier RMD age). Otherwise, it doesn’t matter, as accounts consolidate for beneficiaries.
  “The older person should do the conversions first.” – Joe (17:12)
• Appreciation for Listener Clarifications:
  “David, you are correct. That’s the correct statement.” – Big Al, on the IRS Rule 55 technicality (13:21)

Lighthearted Moment

• Playgroups: Joe’s total confusion about neighborhood “playgroups” (15:32–16:59) brings a comic interlude.

3. Thomas: When to Spend Down Your Roth IRA?

• Scenario: At 66, Thomas has been carefully converting to Roth, staying under IRMAA/22% brackets. He wonders when and why he should tap Roth money, rather than just admiring its growth.

Key Clarifications

• Misunderstood Rule: Thomas worried about the “rolling five-year rule” on Roth conversion access.
  “There’s no rolling five-year because you’re over 59½.” – Joe (19:06)
  Once over 59½ and past the initial five-year clock, Roth conversion amounts can be withdrawn tax/penalty-free.

Strategies for Roth Withdrawals

• Only Tap Roth for Needs Above Low Bracket:
  “Why waste a Roth to replace income that is taxed at the lowest rate? Exactly. So you’re right on point.” – Joe (21:28)

• Main Uses:

  • Large purchases that would otherwise force traditional IRA withdrawals into higher tax brackets
  • Smoothing income after a spouse’s death (when tax brackets shrink)
  • As a legacy asset

• Hosts’ Big Picture: Use Roth money to keep yourself out of higher brackets and as a source of tax-free flexibility—don’t spend it just because it’s there.

Memorable (and Frugal) Moment

• Thomas drives a 2005 Buick LeSabre with 230K miles—“Take some money out of your Roth and buy a better [car]!” – Big Al (23:15)

4. Lizzie & Billy in Texas: Is $3.5M Enough? When to Convert?

• Scenario: Ages 55 & 58, $3.5M total ($2.8M pre-tax, $720K taxable, $8K Roth), two kids (almost off payroll), want to retire in 7 years (ages 62/65) and spend $120K/yr.
• Question: Is their plan robust, and when should they start Roth conversions?

Hosts’ Spitball

• Distribution Rate Checks Out: “That’s a 3.1–3.5% distribution rate. I think you’re fine. As soon as the kids are off the payroll, you can retire.” – Big Al (28:35)
• On Roth Conversions: The earlier, the better—especially before RMDs and Social Security spike their income.
• No Panic Needed: With their current savings rate and ages, and if expenses drop as kids launch, they're in the clear.

Notable Quotes & Memorable Moments

• “What makes this nice is there’s so much in a non-retirement account… I’d just like to see a little more balance in tax deferred versus tax free.”
  – Big Al, on Joe Mama’s flexibility (11:03)
• “Forget the 0% capital gains rate for two or three years, convert even to the top of the 22 or 24% bracket… then go back.” – Big Al, on timing large Roth conversions (08:14)
• “Why waste a Roth to replace income taxed at the lowest rate?” – Joe (21:28)
• “Take some money out of your Roth and buy a better [car]!” – Big Al, to Thomas (23:15)
• “Everything’s a poodle nowadays.” – Big Al, discussing hybrid dog breeds (26:27)
• “Show’s called you Money. You’re welcome.” – Joe Anderson, classic sendoff (29:30)

Timestamps for Key Segments

• 00:46 – Joe Mama in Virginia: Roth vs. 0% Cap Gains
• 6:02 – The “Tax Sandwich” effect of Roth conversions plus realized gains
• 8:14 – Suggested Roth conversion window strategy
• 12:03 – David & Shannon: Which spouse to convert? IRS Rule 55 technicality
• 17:07 – Why (and for whom) convert each spouse’s IRA
• 18:13 – Thomas: “How and when do I actually use my Roth?” (Five-year rule confusion addressed and Roth spending strategies)
• 25:47 – Lizzie and Billy in Texas: Is $3.5M enough? Plus Roth conversion timing

Summary Table – Listener “Spitballs”

| Listener | Core Dilemma | Hosts' Advice/Takeaway | |----------------------|-------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------| | Joe Mama (VA) | Roth vs 0% cap gains; advisor nudge | Run the numbers: Large Roth conversions for a few years, don’t get tunnel vision on 0% gains, consider tax-lot harvesting | | David & Shannon (CA) | Only converting husband’s IRA | If one spouse is older, convert theirs first; if same age, it doesn’t matter; David correct on Rule 55 nuance | | Thomas | When/why to tap Roth | Only use Roth to avoid higher brackets, large one-time purchases, or as legacy—don’t withdraw just because it’s there | | Lizzie & Billy (TX) | Is $3.5M enough? When to convert to Roth? | Spending level is safe, Roth conversions should start pre-retirement and before RMDs/SS, kids off payroll = green light |

Tone & Style Notes

• The podcast maintains a fun, approachable tone while delivering sophisticated financial advice.
• Banter about “playgroups,” dog breeds, and old cars adds warmth and relatability.
• Technical explanations are sandwiched between jokes and plain-English analogies.

Final Takeaways

• Don’t Let the 0% Cap Gains Rate Trap You: Sometimes it pays to forego temporarily for long-term tax diversification and Roth growth.
• Who Should Convert? Go with the older spouse (earlier RMDs), otherwise, it’s a toss-up.
• Roth Spending Strategy: Only tap Roth when you’d otherwise hit high brackets, or for flexibility/legacy—not for routine expenses taxed at low rates.
• Retiring on $3.5M (in your 50s): Looks solid if withdrawal rates are low and expenses drop as kids become independent.
• Professional Guidance Matters: Each scenario hinges on detailed number-crunching—don’t navigate tax planning in isolation.

For more, get a free financial assessment or check out the podcast’s resource links at YourMoneyYourWealth.com.