Your Money, Your Wealth Podcast - Episode 535 Summary: "When Do Roth Conversions Stop Making Sense?"

In Episode 535 of the "Your Money, Your Wealth" podcast, hosts Joe Anderson, CFP®, and Alan "Big Al" Clopine, CPA, delve into the intricacies of Roth conversions, discussing when they remain beneficial and when they might no longer make sense. The episode features real-life scenarios from listeners, strategic insights on tax management, and a candid discussion on financial planning tools.

1. Introduction to Roth Conversions

The episode kicks off with a listener question from Ryan in Texas, who is in the 32% tax bracket and seeks advice on optimizing his retirement savings to potentially lower his tax bracket. Additionally, Veronica, also from Texas, is contemplating whether to pay taxes now to convert to a Roth IRA despite being in the higher 37% tax bracket. Jerry from Phoenix poses a more complex question: Is there a point where Roth conversions no longer make sense?

2. Listener Scenarios and Host Responses

a. Employing Market Downturns for Roth Conversions

• Listener Feedback (00:44): A listener named Al from Florida shares his experience: "During the market plunge, either Big Al or Joe recommended to use Market drop to do Roth conversions. I did. And with the market recovery, I have recaptured 30% of, of the taxes I paid. Boom. I would not have thought of doing that. Thanks again." (00:44).

• Hosts' Strategy Discussion (01:03 – 03:07): Big Al Clopine emphasizes the importance of leveraging market declines for Roth conversions:

  "If the market's down, you're going to pay lower taxes and let that market recover while it's in a Roth IRA and that future growth is tax-free." (01:03).
  Joe Anderson adds the significance of disciplined asset management beyond mere asset allocation, highlighting strategies like tax loss harvesting and timely Roth conversions.

b. Ryan's Tax Strategy Questions

• Listener Question (04:14 – 07:56): Ryan, from Texas, details his financial scenario, including combined income of $405,000, aiming to maximize his 401(k) and considering whether to switch from Roth to traditional accounts to stay within a lower tax bracket.

• Hosts' Recommendations (05:34 – 07:56):
  Joe advises Ryan to:

  "Fully fund the 401 plan. And then if he can do Roth IRAs, do Roth IRAs. If he can't qualify for Roth IRAs, do backdoor Roth IRAs." (05:34).
  Big Al concurs, suggesting:
  "Maybe do that as a traditional to get to the top of the 24%. If you're younger, then chances are your income is only going to go up. Tax rates are probably going to go up. So why not just max out the Roth, do it and forget about it." (06:49).
  They further discuss the merits of mega backdoor Roths and the prioritization of funneling excess funds into brokerage accounts post-Roth contributions.

c. Jerry's Inquiry on Cessation of Roth Conversions

• Listener Question (13:23 – 21:18): Jerry from Phoenix inquires if there’s a logical point where Roth conversions no longer make sense. He mentions having substantial after-tax assets and is considering stopping Roth conversions based on financial software recommendations.

• Hosts' Response (13:45 – 21:18):
  Joe and Al dissect the limitations of financial planning software like Bolden, emphasizing that such tools often rely on static assumptions and may not account for future variables like market fluctuations or changing tax rates.
  Al points out:

  "These programs assume that you're both going to live forever, and it's completely different tax rates." (18:44).
  Joe underscores the importance of annual reviews:
  "You have to look at this stuff every single year and make decisions every year and update the numbers every single year." (17:34).
  They conclude that Roth conversions can still be beneficial depending on individual circumstances, especially if assets are expected to grow significantly within Roth accounts.

3. Strategic Insights on Roth Conversions and Tax Management

a. Leveraging Market Conditions

Big Al discusses the advantage of converting during market downturns to minimize taxes and capitalize on subsequent recoveries:

"When you convert it, that's what you pay taxes on. And if the market's down, you're going to pay lower taxes and let that market recover while it's in a Roth IRA and that future growth is tax-free." (01:03).

b. Asset Management vs. Asset Allocation

Joe emphasizes that beyond choosing the right mix of stocks and bonds, managing how one reacts to market changes is crucial:

"I think what's more important is how you react to certain markets." (02:30).

c. Tax Management Techniques

The hosts delve into various tax management strategies, including:

• Tax Loss Harvesting: Selling assets at a loss to offset gains.
• Backdoor Roth IRAs: Contributing to a traditional IRA and then converting to a Roth IRA, beneficial for those exceeding Roth contribution limits.
• Mega Backdoor Roth: Utilizing after-tax contributions in 401(k) plans to fund Roth IRAs.

d. Importance of a Disciplined and Adaptive Approach

Both hosts stress the necessity of regularly reviewing and adjusting strategies to align with changing financial landscapes and personal circumstances.

4. Evaluating Financial Planning Software

A significant portion of the episode critiques the reliance on financial planning software for long-term Roth conversion decisions.

• Joe's Critique (16:53 – 18:44):

  "We have no idea what markets are going to do. We have no idea what inflation's going to do. We have no idea what your life is going to bring." (16:56).
  He advises listeners to use such tools as guides rather than definitive solutions, advocating for annual reviews and personalized adjustments.

• Big Al's Input (19:36 – 20:33):
  Highlights the static nature of software assumptions, such as fixed tax rates and indefinite lifespans, making them less reliable for nuanced, long-term decisions.

5. Final Recommendations and Key Takeaways

• Maximizing Roth Benefits: The hosts encourage fully funding 401(k) plans and utilizing Roth and backdoor Roth strategies where feasible to capitalize on tax-free growth.

• Customized Strategies: Emphasize tailoring approaches based on individual age, income, tax brackets, and retirement goals rather than relying solely on automated tools.

• Continuous Evaluation: Advocate for regular financial assessments to adapt to market changes, personal financial situations, and evolving tax laws.

• Estate Planning Considerations: Highlight the importance of minimizing taxable estates, ensuring heirs benefit optimally from inherited assets.

• Avoiding Common Pitfalls: Warn against over-converting, not having sufficient funds to pay conversion taxes, and neglecting the impact on other tax-related aspects like Social Security taxation and IRMAA.

6. Conclusion

Episode 535 of "Your Money, Your Wealth" provides a comprehensive exploration of Roth conversions, offering valuable insights for individuals at various stages of their financial journeys. Through real-life listener scenarios and expert analysis, Joe Anderson and Big Al Clopine equip listeners with the knowledge to make informed decisions about their retirement and tax strategies. The emphasis on personalized, adaptable approaches underscores the complexity of financial planning, encouraging proactive management and continuous learning.

For more detailed discussions and personalized financial strategies, listeners are encouraged to access the free Financial Blueprint tool and consider scheduling a comprehensive financial assessment with Pure Financial Advisors.

Notable Quotes:

• Big Al Clopine (01:03):

  "If the market's down, you're going to pay lower taxes and let that market recover while it's in a Roth IRA and that future growth is tax-free."

• Joe Anderson (05:40):

  "Fully fund the 401 plan. And then if he can do Roth IRAs, do Roth IRAs. If he can't qualify for Roth IRAs, do backdoor Roth IRAs."

• Joe Anderson (16:56):

  "We have no idea what markets are going to do. We have no idea what inflation's going to do. We have no idea what your life is going to bring."

• Big Al Clopine (19:36):

  "There's all sorts of things to consider."

Additional Resources:

• Financial Blueprint Tool: Calculate your financial standing and retirement readiness by inputting your income, savings, investments, debt, expenses, and goals. YourMoneyYourWealth.com

• Schedule a Financial Assessment: Connect with Pure Financial Advisors for a no-cost, no-obligation comprehensive financial assessment tailored to your retirement needs and goals. Visit Pure Financial Advisors or call 888-994-6257.

Stay informed and make your financial journey both strategic and enjoyable with "Your Money, Your Wealth."