When Do Roth Conversions STOP Making Sense? - 535

Summary

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.

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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?

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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.

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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.

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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.

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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.

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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.

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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."

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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.

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

Transcript

[Andy Last]

Ryan in Texas is in the 32% tax bracket. Where should he save for retirement so he'll be in a lower bracket? Should Veronica in Texas pay the taxes now to convert to Roth for lifetime tax free growth in the future, even though she is in the 37% tax bracket. And Jerry in Phoenix wonders if there is any point at which Joe would come to the conclusion that Roth conversions no longer make sense. That's today on youn Money, you, wealth podcast number 535. First up, a word of Roth conversion. Thanks from Al in Florida. I'm executive producer Andy Last and everlovin Adelaide with the hosts of youf Money, you, Wealth, Joe Anderson, CFP still in Minnesota as you watch or listen and currently not thinking about YMYW at all. In Greece, Big Al CLO finds cpa.

[Joe Anderson]

All right, let's go to Big Al. This is your brother in Florida, apparently. Yeah, just want to thank you guys. 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.

[Big Al Clopine]

How about that?

[Joe Anderson]

Boom. I would not have thought of doing that. Thanks again.

[Big Al Clopine]

Yeah, that's, that's a good strategy that, that I think a lot of people don't necessarily think about. So it's simply this. So the market declines and instead of freaking out, look at the opportunities that you have. One opportunity that you have is consider the money in your IRA 401k. Can you convert it to a Roth IRA? Because whatever you convert, whatever it's worth, 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.

[Joe Anderson]

Yeah, he cut a check to pay the tax and all of a sudden he looks a month later, it's like, well, wait a minute, I just recovered everything that I paid in debt.

[Big Al Clopine]

I'm caught up. Yeah, look at that.

[Joe Anderson]

I broke even. So, yeah, I think there's so many different strategies that you need to be thinking about in regards to how you're managing your assets. I think when people think about asset management, they think about the asset allocation. How much money should I have in stocks and bonds and what stocks should I buy or what bonds should I buy and should I get in alternatives? Yeah, of course all of that is important, but I think what's more important is how you react to certain markets. If you have a strategy on managing the Risk, such as when markets go up or down, that you're constantly selling high and buying low, or what are you doing from a tax management perspective, such as tax loss harvesting? So if you have money in a capital asset account or a brokerage account, and when those assets go down, can you sell and buy something similar to start harvesting losses to offset against future gain? And the one that we just talked about is like doing Roth conversions. So there's so many other strategies that you should be thinking about if you have a disciplined approach. Look at Big Al here, right? He got 30% of his money back. And who knows what he was invested in if he had just a simple low cost, globally diversified allocation. And if he does things appropriately when markets get a bit scary, he's going to be way ahead if he would have picked the best investment in most cases.

[Big Al Clopine]

Yeah, absolutely. I mean, it's, it's. And that's the thing most people think about. I don't even want to think about the market or they sell, which is a terrible mistake. Right, right.

[Joe Anderson]

But I would say most people sell.

[Big Al Clopine]

Yeah. I mean, that's what you think about doing. It's like, I can't afford to lose any money, Joe. Al, I'm retired. I don't have that much time. Well, wait a minute. You retired at 62 and life expectancy is into the late 80s, right? You have a lot of time. You need. You need some growth. You need some growth for inflation.

[Joe Anderson]

All right, let's. Let's move on. Let's go to. Hey, guys and gal. My name is Ryan. I'm from Texas. I first want to say I love the show. Great, great info and very entertaining. I love the wit.

[Andy Last]

Y' all so witty's talking.

[Big Al Clopine]

They were talking about you or me?

[Joe Anderson]

I think it's you, Big Al.

[Big Al Clopine]

Both.

[Joe Anderson]

Yeah. Tax chat with Big Al. I drive a Ford F150 and I love a drink. A good old Fashioned or a cold beer. Ford F150. I've been contributing the maximum amount to my Roth 401 since I was. Since it was available, thanks to this shy year.

[Andy Last]

I think it started with thanks to this year, my wife and I. So I think he might have left out a word or two.

[Big Al Clopine]

Oh, yeah, Just go with the year. Thanks.

[Joe Anderson]

This year, Roth 401k, since it was available. Thanks to this year, my wife and I have some bumps in pay. And we'll be making 405,000. We'll be making $405,000 combined jointly.

[Big Al Clopine]

Sounds like a great year.

[Joe Anderson]

Sounds like a great year.

[Big Al Clopine]

Not Too many bumps there.

[Joe Anderson]

No big bumps. That puts us at 21,000 into the 32% tax bracket. Should I switch out of a Roth to keep in the lower bracket? My wife will still put hers in the Roth. That leads me to the second question. I max out my 401, but my wife only takes advantage of the match. Now that we have increased income, should I max hers out or should I begin putting money into a taxable account? Right now, I think I'm on track to hit my 401 goal of $3 million by age 65. That goal obviously be higher if both of us maxed out the 401 each year. Or should I keep my goal where it is and add into a taxable account? Thank you again. All right. 32% tax bracket.

[Big Al Clopine]

Yeah. Only $21,000.

[Joe Anderson]

Here's my rule of thumb in savings. Ryan.

[Big Al Clopine]

Okay.

[Joe Anderson]

Fully fund the 401 plan.

[Big Al Clopine]

Yep.

[Joe Anderson]

And then if he can do Roth IRAs, do Roth IRAs. If he can't qualify for Roth IRAs, do backdoor Roth IRAs.

[Big Al Clopine]

Okay. So. So that means if you can do backdoors.

[Joe Anderson]

Yeah, I would imagine Ryan can do a backdoor. Because if he has IRAs, put those IRAs into your existing 401, then you do a non deductible IRA contribution, convert those to Roth, have your wife fully fund, max it out. If she's doing Roth, fine, have her do Roth. She probably should do pre tax. If I was Big Al, I don't know how old Ryan is, though.

[Big Al Clopine]

I don't either. Yep, that would be helpful.

[Joe Anderson]

If he was in his 40s, 30s or 40s, I would say probably do Roth. If he's in his mid-50s, getting closer to 65, maybe pre tax at the 32% bracket.

[Big Al Clopine]

Yeah, I'm right with you. I think if you're near retirement, 32% bracket, I don't really like. Right. So I would. I would actually. 21,000 is what you're saying. You're into the 32% bracket. 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.

[Joe Anderson]

Yeah. So max out 401s, go to backdoor Roth IRAs. And then after that, I would do the mega backdoor. So do you have an after tax component in the 401 plans? If you do, I would take full advantage of that and convert those to Roths. And then from there, I would start building up the brokerage account.

[Big Al Clopine]

Yep. Makes sense.

[Joe Anderson]

$400,000 a year.

[Big Al Clopine]

A lot to work with.

[Joe Anderson]

Yeah, a lot of work with there.

[Big Al Clopine]

Yeah. Yeah. And if you think about it this way, anytime you have a choice, you're going to retire at 65. It appears, based upon what you told us, anytime you have a choice, would you rather have money in a Roth IRA, which is fully available at 65, or a brokerage account, which you have to pay taxes on? Well, the answer is easy. I'd rather have a Roth than a brokerage account.

[Joe Anderson]

100%.

[Big Al Clopine]

Now, if you need the money before you retire, that's different. Right? If you need the money before you retire, like for another house or vacation home or something that, you know, kids, college. Well, that's different. Then. Then put some money in the brokerage account if you have a need for it. Otherwise, try to get the money into the Roth. You'll be happy.

[Joe Anderson]

All right, moving on. Weronica. What the hell is this?

[Andy Last]

I believe it's just pronounced Veronica, but it's Polish. It's Polish. So it starts with a W, but it's pronounced Veronica.

[Big Al Clopine]

Let's say Veronica.

[Joe Anderson]

Oh, really? I've never seen Veronica spelled with a.

[Big Al Clopine]

W. Well, the traditional Hawaiians say Hawaii. Yep. So it's with a V. The W is a V. So that's the same concept here.

[Joe Anderson]

Okay.

[Andy Last]

Joe's learning something new every day.

[Joe Anderson]

This is the show I've just. It's a gift that just keeps giving.

[Big Al Clopine]

It's just amazing. And that's why you want to get out of here.

[Joe Anderson]

Oh, man. Don't even go there. Let's go.

[Big Al Clopine]

Oh, you. You know you love it. You're gonna be here forever.

[Joe Anderson]

Oh, yeah. Forever's two years. I'm 43 years old. My husband's 55. We live in Texas. No kids. Drink of choice is buttery chardonnay for me, bourbon for my husband. We're looking to retire in one to two years, move to Europe, and anticipate annual expenses of less than $120,000. What adjustments to my savings, investments should I make, if any? We are currently in the top bracket. We have no debt, including no mortgage on a house of $1 million. I have the following. 2.3 million bucks, $260,000 in cash, $700,000 in a 401, $100,000 in Roth 401 and $1,200,000 in a brokerage account. I have 50% of my salary. That maxes out the 401 12% after tax pay and 50% annual bonus goes to the Roth IRA. All right. My husband has an additional $4.5 million of savings and investments. Hey, Veronica.

[Big Al Clopine]

You're doing pretty well.

[Joe Anderson]

You're doing pretty good.

[Big Al Clopine]

Check.

[Joe Anderson]

Should I try to put as much as possible between now and retirement into a backdoor Roth IRA? Right now, I plan to contribute $80,000 a year versus non Roth investment accounts. I still plan on maxing out the 401 to the employer match when we retire. We anticipate dropping in the lower bracket should I or my husband convert part of the 401. Okay. So you got a lot of stuff going on here, Veronica. You're 43 years old. Your husband's 55. So you got $2.5 million. Your husband has $4.5 million.

[Andy Last]

And she mentions he does not have any Roth at all right now.

[Joe Anderson]

Okay. Yep. And so you're making good income. Where should the money go? I think it's the same strategy that we just talked about.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I would fully fund your 401 plan. I would do after tax contributions, if they allowed, and do the conversion. And then I would do backdoor Roth IRA contributions all day, every day.

[Big Al Clopine]

And then. Yeah, go ahead and do the Roth conversions. When you retire, you'll be in a lower bracket. Should you go to the top of the 22% bracket or 24%? Well, we don't know how much your husband has in deferred accounts, but based upon the total assets that you have, it would likely be beneficial to go to the top of the 24% bracket. It's a good bracket. We don't know how much longer it's going to be around. You appear to have resources to pay the taxes, so that would be a really good thing. But not when you're in the highest tax bracket.

[Joe Anderson]

Right. Yeah. You're going to spend $120,000 a year, and you're going to have 4, 5, 6, 7, $8 million.

[Big Al Clopine]

Yeah. Going to be a lot of income, a lot of taxes on money you don't need.

[Joe Anderson]

Yeah. I would get as much money into the Roth IRA as possible. What tax bracket are they in? Right now?

[Big Al Clopine]

They're in the top.

[Andy Last]

Top. So 32.

[Big Al Clopine]

37.

[Andy Last]

Sorry, 37 tax bracket.

[Big Al Clopine]

Yeah.

[Andy Last]

Yeah, I forgot there was a 37.

[Big Al Clopine]

Yes, there's a 37. Yeah. That's why I would do Roth conversions after they retire.

[Joe Anderson]

Yeah. But fully fund the 401 plans. If there's after tax, do the after tax, do the back door, and then everything else funnel into the brokerage account.

[Big Al Clopine]

Yeah, me personally, I would do the traditional 401k instead of any Roth component, but I'd fund the after tax component just like you said. So you can put that directly into the Roth. So that can be a good way to go the highest tax bracket. Though you kind of want to get a tax deduction now, I would say.

[Andy Last]

Are you ready for retirement? Are you prepared? Are you nervous? How you prepare in the last few years before you retire will greatly impact what kind of retirement lifestyle you'll enjoy. This week on a brand new episode of youf Money, you, Wealth tv, Joe Anderson, CFP and Big Al Clopine, CPA count you down to retirement with the must do preparations to that'll get you ready to punch the clock for the final time. Watch the last five years before retirement will decide your lifestyle. Here's how on YMYW tv. Then calculate your free Financial Blueprint to see if you're on track for the big day financially. Just input your income and savings, investments and debt, and your expenses and goals. The Financial Blueprint tool will analyze your current cash flow, your assets and your projected spending for retirement and output a detailed report outlining what you can do now to help you achieve those retirement goals, minimize stress, maximize life, and prepare for the future. To start taking control of your retirement, just click the Financial Blueprint link in the episode description.

[Joe Anderson]

Hello Andy, Joe, Big Al, this is Jerry from Phoenix looking for a little spitball response and whether there is a logical point where no additional Roth conversion makes sense. Actually, this is really my attempt to see if Joe would ever come to the conclusion. Yes, I come to that conclusion all the time.

[Big Al Clopine]

I've heard it on the show.

[Joe Anderson]

I drive a 2021 BMW 430i, but my backup is a 1997 Tacoma. I used to take the dog to the dog park and go hiking in South Mountain park in Phoenix. You ever been to South Mountain Park?

[Big Al Clopine]

I don't believe so. I'm not sure I know where it is.

[Joe Anderson]

I've never heard of it. My wife and I Both retired about five years ago. We were 67. Our current balances are about $7 million after tax. Oh boy. Way to go Big Chair.

[Big Al Clopine]

Here we go.

[Joe Anderson]

$3.5 million in an IRA, $950,000 in a Roth. While I'm not concerned about having enough assets to live on, I'm trying to make sure I maximize our lifetime tax bill and minimizing the taxable IRA balances so that our two sons that will inherit will get killed in taxes. I Started doing roth conversions about four years ago and plan to continue converting about $200,000 a year for the next six years until my RMDs begin for 2025. I've already done $90,000 in conversions. I've heard several financial podcasts refer to and sort of endorse a software package for financial tax planning called Bolden, formerly New Retirement.

[Big Al Clopine]

Well, yeah, we know about New Retirement. Yep. I met Steve Chen years ago.

[Joe Anderson]

Love the guy. Great company.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I've acquired this software and for the past three weeks, I've updated the software to include all assets, income sources, planned expenditures assumed 2017 tax rates, et cetera. After reviewing the results and recommendations, I have to admit I am very surprised by the results. Heard this software. The advice is to do no further Roth conversions. The software believes this approach will minimize my lifetime tax bill, federal and state, and provide the largest estate value. Obviously, the software doesn't know the tax brackets of my heirs and what the future tax rates will be. I was just expecting the no additional Roth recommendation. What do you think?

[Andy Last]

I'm not expecting. Yeah.

[Joe Anderson]

Okay. Jerry's 67 years old, so we're missing a few important facts here. Jerry, I don't know what your income is. You're doing $200,000 conversions. I have no idea what bracket you're getting yourself into.

[Big Al Clopine]

Right. Yeah. We don't know how much your fixed income is, what your tax bracket is. See, that would be helpful to know because whether you do a Roth conversion or not is dependent upon your age, how much you have and how much you're spending. Not only how much you have, how much you have in an IRA, 401k, how much you have in a Roth, how much do you have in a non retirement account? Then we can sort of decide or help you with whether that's a good decision or not.

[Joe Anderson]

Yeah. Here's what you have to look at. Sometimes that those. You have to be very, very careful. And no offense to New Retirement or Bolden. We use that. We offer that software for free to our listeners.

[Big Al Clopine]

It's a good program.

[Joe Anderson]

EasyRetirement.com.

[Big Al Clopine]

Yeah.

[Joe Anderson]

E, A, S, I. That's why no one ever went to the website.

[Big Al Clopine]

We don't know how to spell it.

[Joe Anderson]

It's not. It's like, yeah, I went to Easy.

[Big Al Clopine]

Well, no, there's nothing there.

[Joe Anderson]

There's nothing there.

[Big Al Clopine]

It says you can have this website if you want it.

[Joe Anderson]

It's easy.

[Big Al Clopine]

Yeah.

[Andy Last]

ESI retirement.com.

[Joe Anderson]

Yeah. Okay. I don't even know what.

[Andy Last]

You don't even know the Website?

[Big Al Clopine]

Yeah.

[Joe Anderson]

We get four visitors a year by accident.

[Big Al Clopine]

Just listen to Annie. He knows the website.

[Joe Anderson]

I don't even know what I was talking. Okay, no financial planning software.

[Andy Last]

Why don't you pay attention to easiretirement.com?

[Joe Anderson]

You got to be careful with financial planning software. We use it every day. It's looking at a snapshot and time that day. I can guarantee you this, Jerry. Everything else that you see in the future is wrong. You have no idea what markets are going to do. You have no idea what inflation's going to do. We have no idea what tax rates are going to do. We have no idea what your life is going to bring. So when you're like, here, let me plan this out from age 67 to 97 or to age 100, and then you look at the tax savings number, and that computer software is going to be like, yep, no conversions. You're like, all right, I'm done. No, you don't want to necessarily do that. You have to take a look at this stuff every single year. And also the rate of return that you're running on the investments, you're using a hypothetical, let's say, 6% growth rate. Well, if you do a straight line 6% growth rate, it's. It's going to be. Apples. Apples. It's just. It's really hard to really make decisions long term if you're looking at that way. You have to look at it and make decisions every year and update the numbers every single year.

[Big Al Clopine]

Yeah, because one of the things that happens here is when you, when you have these, these programs, they'll generally have a fixed tax rate. Right. So, and so that's why it doesn't necessarily make sense because you're going to be in different tax brackets. You're in a higher tax bracket. Often when you're working, you retire before your RMD is before Social Security, you're in a much lower bracket. You want to do Roth conversions to take advantage of that. Maybe you're already receiving Social Security, but it's ahead of required minimum distributions. Right now the tax rates are pretty low, so it may make sense to go ahead and do a conversion. Also, these programs assume that you're both going to live forever. One of you will probably outlive the other, and you get into the single rates, and it's completely different tax rates. So just, just be careful. When you're kind of looking at a program, this is a good program, but you're looking at a program with only so many variables, and you're making long term conclusions on that.

[Joe Anderson]

$3.5 million. He's got a retirement account. He's 67 years old.

[Big Al Clopine]

Yeah. It's going to be five or six million at RMD age.

[Joe Anderson]

Right? Well.

[Big Al Clopine]

I think he's 73.

[Joe Anderson]

Okay.

[Big Al Clopine]

Yeah. So he'd get it 70.

[Joe Anderson]

Let's say it's four million bucks.

[Big Al Clopine]

Yeah, just go four.

[Joe Anderson]

So $160,000 RMD. I don't know what his other fixed income sources are, so just kind of think of it that way. It's like, all right, well, what tax bracket am I going to be? And when the RMD is here, hit right. Am I going to be in the 24, the 22.

[Big Al Clopine]

And compare it to today.

[Joe Anderson]

To today, I would convert to the same bracket that I'm in today. So if I'm in the 24% tax bracket, because you have plenty of assets, like he said, and he wants to maximize the amount of dollars that it's going to go to his two kids. So what tax bracket are the kids in? Because once they inherit the retirement accounts, it's IRD income respected to decedent. They have to take the money out and pay ordinary income tax on that.

[Big Al Clopine]

Yeah. Over 10 years and they may be in a high bracket. And that would be a lot of money to take out in 10 years.

[Joe Anderson]

Right. If it's in a Roth, it's 100% tax free. And there's no RMDs in a Roth IRA. Right. So it's like, all right, well, here, can I continue to convert this thing that's going to reduce my rmd. If I pass before my spouse, the RMD for her is going to be the same RMD that you're taking. Roughly. But now it's at a single tax bracket. So there's all sorts of things to consider. At $3.5 million in retirement accounts with no need for the money at 67, I don't know, unless you got a $200,000 pension, I don't know what's going.

[Big Al Clopine]

Yeah, unless you're the highest bracket.

[Joe Anderson]

Yeah. If you're like converting into 32% tax bracket or something.

[Big Al Clopine]

Yeah, I wouldn't do that. I wouldn't do that either.

[Joe Anderson]

But yeah. Jerry, congratulations on the amount of wealth that you have. Congratulations on being an engineer and going to all these different websites and trying to figure out the most optimal Roth conversion possible. But, you know, just like with anything, it's optimal each year. Like the market's down 20%.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I don't care what tax bracket that you're in. I'm doing it $3.5 million.

[Big Al Clopine]

I'm doing a conversion because the assets are going to recover in the Roth, and then it hardly matters what bracket you're in. In fact, you kind of. One way to think about it is you look at what you ended up with in the Roth, by the time you have to pay the tax. Right. And compare it to the tax you paid, that'll actually be probably pretty low rate. If the market zooms right up, you.

[Joe Anderson]

Look at asset location. Usually if you have a strategy, an investment management strategy, you have asset classes that have a higher expected rate of return in your Roth ira because you'll never pay taxes on it. I don't want to have bonds and cash and CDs in my Roth.

[Big Al Clopine]

No, you don't get rewarded for that growth because there's no tax to pay in a Roth. So why wouldn't you want your stuff.

[Joe Anderson]

Gas on there, right?

[Big Al Clopine]

Yeah. But load it up.

[Joe Anderson]

Well, we want some firecrackers in there. And so if you look at that, all right, so now I have more stocks or stocks that have a higher expected rate of return in my Roth. So maybe they have an average rate of return that is higher than the s and P500 or a globally diversified portfolio. So there's so many other things, you know, that you have to consider. But here's the other thing that you don't want to do a Roth conversion on. If you don't have the cash to pay the tax, don't do it.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Let's say if you're going to now pay more tax on your Social Security, probably doesn't make sense where we've seen people that have very little tax on their Social Security because it's based on provisional income. And all of a sudden you do a Roth conversion, it's like, oh, now all of a sudden more of my Social Security is subject to income tax, and it just pops them up into a higher bracket. There's irmaa. Right. So if you're going to go into a higher irmaa, you might want to consider maybe not doing that. You have to run the numbers there. There could be credits that you're giving up.

[Big Al Clopine]

Yeah, yeah. Educational credits. You could be. You could own rental properties. Right. And you get a $25,000 deduction. But with that Roth conversion, that goes away. You converted $50,000, but all of a sudden you have to pay tax on 75,000 more dollars. That's not a good deal.

[Joe Anderson]

Now, we saw someone wanted to get out of individual Stocks. So they sold X amount of dollars out of the stock. Oh, and then they did a Roth conversion on top of that. And then now that capital gains is subject to net investment income tax. Probably don't want to do that. If I want to look at diversifying from a stock and be in that 0% capital gains rate, I probably don't want to do a conversion. See, Jerry, look at that. That's like 10 things that you don't want to do a Roth conversion. What else do I got for. How about the Affordable Care Act? Oh, I. Oh, boy.

[Big Al Clopine]

That's another. That's actually a pretty big one.

[Andy Last]

This is starting to remind me of that scene from Roxanne where Steve Martin starts listing all of the insults for his having of a big nose. You know that scene that I'm talking about, right, Joe?

[Big Al Clopine]

Yeah. That is good. You're just.

[Andy Last]

You're starting to reel off all the reasons that somebody should not do a Roth conversion, because, dang it, that's what you're known for, is the Roths.

[Big Al Clopine]

All right, okay.

[Joe Anderson]

Well, but I still think Jerry should probably do it.

[Big Al Clopine]

I do, too, but we need a little more information.

[Joe Anderson]

All right, Andy, this is what, the last show you're gonna do here in the stateside?

[Andy Last]

Well, that depends. I think there might be one more. It sounds like Al and I might be recording one more.

[Big Al Clopine]

Yeah, I'll do one with you next week. We'll do Social Security.

[Andy Last]

Sounds good. So, yes, that will be my last one. This is the last one with all three of us together.

[Joe Anderson]

Got it. Alan wants to do some Social Security time.

[Big Al Clopine]

I can't wait.

[Joe Anderson]

Little Social Security chat.

[Big Al Clopine]

Yes, Social Security chat.

[Joe Anderson]

Got it. Hey, gal.

[Big Al Clopine]

Well, it was fun. Again.

[Joe Anderson]

Yes, sir.

[Big Al Clopine]

As usual. Good job, Joe.

[Joe Anderson]

Great job, Big Al.

[Big Al Clopine]

Yep. And, Andy.

[Joe Anderson]

Yeah?

[Andy Last]

Thank you. Your Money, you, Wealth is your podcast. If you enjoy it, do us a favor and tell your friends that helps us reach more listeners like you. And don't forget to leave your honest reviews, comments, and ratings for your Money, you, Wealth in Apple Podcasts, on YouTube, and in all the other apps that let you do that. Your Money, you, Wealth is presented by Pure Financial Advisors. Learn how to make the most of your money and your wealth in retirement. It takes more than a spitball. You can schedule a no cost, no obligation comprehensive financial assessment with the experienced professional on Joe and Big Al's team at Pure. Just like a spitball, it is free. Click or tap the free financial assessment link in the episode description or call 888-994-6257 to book yours. You can meet in person at any of our locations nationwide, or you can meet online right from home. No matter where you are, the Pure Team will work with you to create a detailed plan that's tailored to meet your needs and goals in retirement. 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, podcast content may be 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.