Your Money, Your Wealth Podcast Episode 518: "Should You Switch Retirement Contributions to Roth?"

Release Date: February 25, 2025
Hosts: Joe Anderson, CFP® & Alan Clopine, CPA
Producer: Andi Last

Introduction

In Episode 518 of "Your Money, Your Wealth," hosts Joe Anderson and Alan Clopine delve into the nuanced debate of whether listeners should switch their retirement contributions from traditional accounts to Roth accounts. The episode tackles listener questions about Roth conversions, backdoor Roth IRAs, tax implications, and strategic retirement planning, all while maintaining the podcast's signature blend of financial insight and humor.

Key Discussion Points

1. Roth Conversion Withdrawal Debate

   • Listener Question: Tyler from Arlington, Virginia, asks whether withdrawing backdoor Roth IRA contributions to fund early retirement incurs a 10% penalty if done within five years.
   • Alan's Insight: At [02:05], Alan clarifies that generally, with Roth conversions, if you're under 59½, you must wait five years before withdrawing the converted amount without penalty. He references IRS Publication 590-B, emphasizing that non-taxable conversions aren't subject to the penalty if handled correctly.
   • Joe's Analysis: Joe explains the legislative intent to prevent loopholes where individuals could convert and withdraw tax-deferred funds immediately. He reiterates that after-tax contributions (backdoor Roth) can be accessed without penalties, aligning with Alan’s explanation.

   Notable Quote:

   Joe Anderson [04:21]: "People would convert their retirement accounts, pay the tax, and then take the money out the next day. So it was a loophole in the law."

2. Contributing to Multiple Roth Accounts

   • Listener Question: Kimberly from New York inquires about contributing to both a Roth IRA and a Roth 403 account.
   • Alan's Response [06:43]: Confirms that it's permissible to have multiple Roth accounts, including a Roth IRA and a Roth 403.
   • Joe's Addition [06:52]: Highlights that 401s or 403s are distinct from IRAs, allowing individuals to maximize their retirement savings by contributing to both.

   Notable Quote:

   Alan Clopine [06:44]: "You can definitely double up there."

3. Strategic Retirement Planning for Federal Employees

   • Listener Profile: Kate from Cleveland, Ohio, a 36-year-old federal agent planning to retire at 50 with a substantial pension and retirement savings.

   • Key Questions:

     1. Should she switch TSP contributions from traditional to Roth?
     2. Continue traditional contributions and plan for Roth conversions.
     3. Limit contributions to match and allocate additional funds to a taxable brokerage account to manage future RMDs.

   • Alan's Recommendation [09:27]: Suggests favoring Roth contributions given her current 24% tax bracket, anticipating higher income and tax rates in the future.

   • Joe's Perspective [10:36]: Agrees with Roth contributions, emphasizing the benefit of locking in the current tax rate before potential increases.

   • Collaborative Advice: Both recommend a strategy that maximizes Roth contributions now to mitigate higher future tax burdens, with Alan suggesting a balanced approach if full Roth conversion isn't feasible.

   Notable Quote:

   Alan Clopine [10:36]: "If that tax rates changed, I would try to stay in the 24%. And so I would split the contributions."

4. Roth Conversions for High-Net-Worth Retirees

   • Listener Profile: Neo from San Clemente, recovering from brain surgery, seeking advice on converting a $1.2 million IRA to Roth.

   • Discussion Points:

     • Balancing tax liabilities with long-term care expenses.
     • Timing Roth conversions before RMDs commence.
     • Considering current and future tax brackets.

   • Alan's Strategy [16:31]: Advises against converting the entire IRA at once, recommending phased conversions to stay within favorable tax brackets.

   • Joe's Input [17:08]: Emphasizes the importance of utilizing current lower tax brackets to manage RMDs effectively.

   Notable Quote:

   Alan Clopine [16:31]: "There's no reason why you would convert the whole 1.2 million."

5. Roth Strategies for Couples with Significant Retirement Savings

   • Listener Profile: Mike from Western PA, a 67-year-old planning retirement with his wife, aiming to manage $5 million in retirement accounts.

   • Key Questions:

     • Should they pursue Roth conversions with their existing $4 million in retirement accounts?
     • How to handle RMDs given their age difference.

   • Alan's Recommendation [19:21]: Suggests conducting Roth conversions within their current tax brackets to minimize future RMD-related taxes.

   • Joe's Advice [20:26]: Encourages utilizing Roth conversions to reduce the tax burden, especially considering the couple's substantial retirement savings and the differential in RMD timings due to age differences.

   Notable Quote:

   Joe Anderson [20:26]: "I would utilize the 24% as much as you can while you're both young and healthy."

6. Early Retirement Strategies for High-Income Tech Professionals

   • Listener Profile: Ricky Bobby from Charlotte, NC, a 33-year-old tech consultant aiming to retire at 43 while maintaining financial independence.

   • Key Questions:

     • Optimal allocation of $85,000 annual savings.
     • Balancing aggressive savings with future lifestyle needs and potential career changes.

   • Alan's Guidance [35:07]: Recommends maximizing 401(k) contributions, utilizing Roth IRAs or backdoor Roths, and directing additional savings into taxable brokerage accounts.

   • Joe's Strategy [36:02]: Projects substantial growth in brokerage accounts, enabling financial flexibility for part-time work or career transitions post-retirement.

   Notable Quote:

   Joe Anderson [35:20]: "Fully fund the 401k plans... funnel into the brokerage account under that $85,000."

7. Tax Liability Concerns for Pre-Retirees with Pensions

   • Listener Profile: Herc and Angel, both in their early 60s, planning to retire with substantial pensions and retirement accounts.

   • Key Questions:

     • Managing tax liabilities due to pensions and upcoming RMDs.
     • Deciding on Roth conversions versus maintaining traditional contributions.
     • Adjusting investment portfolios to include more bonds.

   • Alan's Advice [30:43]: Recommends initiating Roth conversions to manage tax liabilities, focusing on the older spouse to handle RMD timings effectively.

   • Joe's Confirmation [20:26]: Supports Alan's approach, emphasizing the importance of utilizing current tax brackets to minimize future tax burdens.

   Notable Quote:

   Alan Clopine [21:59]: "I would go with the older person to convert that out."

Insights and Conclusions

• Roth vs Traditional Contributions: Converting to Roth accounts can be advantageous, especially when current tax rates are favorable and expected to rise in the future. This strategy locks in today's tax rates, allowing tax-free withdrawals in retirement.

• Backdoor Roth IRAs: For high-income earners who exceed Roth IRA contribution limits, backdoor Roth conversions provide a viable pathway to benefit from Roth account advantages without direct contributions.

• Phased Conversions: Rather than converting entire retirement accounts in a single year, phased conversions help manage and mitigate tax liabilities, keeping withdrawals within lower tax brackets.

• Strategic Planning for Couples: Age differences and RMD timings necessitate tailored Roth conversion strategies to optimize tax efficiency and ensure sustained retirement income.

• Early Retirement Considerations: Aggressive saving combined with strategic Roth conversions and diversified investment portfolios enable early retirees to achieve financial independence while maintaining flexibility for career and lifestyle changes.

Notable Quotes with Timestamps

• Joe Anderson [04:21]: "People would convert their retirement accounts, pay the tax, and then take the money out the next day. So it was a loophole in the law."

• Alan Clopine [06:44]: "You can definitely double up there."

• Alan Clopine [10:36]: "If tax rates changed, I would try to stay in the 24%. And so I would split the contributions."

• Joe Anderson [20:26]: "I would utilize the 24% as much as you can while you're both young and healthy."

• Alan Clopine [21:59]: "I would go with the older person to convert that out."

Additional Resources

• Ultimate Guide to Roth IRAs: Downloadable for free here.
• Retirement Lifestyles Guide: Available for download to help plan lifestyle and financial strategies in retirement.

Disclaimer: The advice provided in this summary is based on the podcast transcript and is intended for informational purposes only. Listeners should consult with a financial advisor for personalized financial planning.