Your Money, Your Wealth Podcast: Episode Summary - "When to HOLD OFF on Doing Roth Conversions - 529"

Release Date: May 13, 2025

In this episode of Your Money, Your Wealth, hosts Joe Anderson, CFP® and Big Al Clopine, CPA delve into nuanced strategies surrounding Roth conversions, capital gains tax optimization, and early retirement planning. With their signature blend of humor and expertise, Joe and Big Al address real-life financial dilemmas posed by their listeners, providing actionable insights tailored to diverse financial situations.

1. Navigating Roth Conversions in High Tax Brackets

Listener Profile:

• John from Boston finds himself in the 32% tax bracket due to substantial royalty income from a successful textbook. At 61 years old, John is contemplating whether to proceed with Roth conversions despite his high taxable income.

Discussion Highlights:

• Big Al Clopine initiates the discussion by breaking down John's financials, emphasizing the impact of RMDs (Required Minimum Distributions) and ongoing royalty income.

  [02:24] Big Al Clopine: "Royalties continue, then convert."

• Joe Anderson highlights the uncertainty surrounding the longevity of royalty income, suggesting that Roth conversions might be deferred until royalty streams diminish.

  [03:20] Joe Anderson: "Maybe a way to think about it, if you think that royalties are only going to be around for, let's say five years, is don't do Roth conversions yet..."

• Andi Last and Big Al further analyze John's situation, considering future tax brackets and the potential for minimizing tax burdens through strategic Roth conversions.

  [13:10] Andi Last: "And if they drain it out, you probably end up paying higher taxes doing the Roth conversions than you might be otherwise if you did less."

Key Takeaways:

• Evaluate the sustainability of additional income streams (like royalties) before committing to Roth conversions.
• Consider the timing of conversions to align with periods of lower taxable income.
• Balance between maintaining liquidity and optimizing tax efficiency.

2. Balancing Roth Conversions with Capital Gains Tax Strategies

Listener Profile:

• Bert and Ernie from New Jersey are evaluating whether to pursue Roth conversions or capitalize on 0% capital gains tax rates amidst their financial growth.

Discussion Highlights:

• Big Al Clopine deciphers the listener's query, focusing on leveraging capital gains tax rates versus Roth conversions.

  [17:21] Big Al Clopine: "Should I convert in the 32% tax break?"

• The hosts explore the intricacies of qualified dividends and capital gains, striving to clarify the listener's terminology and strategy.

  [20:05] Andi Last: "He's talking about the percentage of his income that's qualified versus non-qualified."

• Andi Last advises on prioritizing Roth conversions, especially when poised to exceed favorable tax brackets, while Big Al emphasizes maintaining diversification to preserve liquidity.

  [25:47] Andi Last: "I think that's more important. However, there could be an exception, and that is if you've got brokerage investments that you would like to sell and diversify..."

Key Takeaways:

• Understand the distinction between qualified and non-qualified income to optimize tax strategies.
• Prioritize Roth conversions when expecting to enter higher tax brackets due to income changes.
• Maintain a diversified portfolio to balance tax efficiency with investment flexibility.

3. Early Retirement Planning and the Role of Bridge Accounts

Listener Profile:

• Michael and his wife from Bellevue, both 34 years old, earn approximately $350,000 annually. They aim to retire in their early to mid-50s and seek advice on Roth contributions and the establishment of a bridge account to support early retirement years.

Discussion Highlights:

• Big Al Clopine reviews their substantial retirement accounts and contemplates the optimal strategy for Roth contributions versus traditional accounts.

  [27:54] Big Al Clopine: "You're making a ton of money now, though, already 350 grand."

• The hosts advocate for maximizing Roth contributions given their current tax bracket, predicting an increase in earnings which would make Roth accounts increasingly advantageous.

  [27:33] Andi Last: "So I would stick with now. Maybe later you're making $500,000 or whatever, then send us a note, we'll discuss it again."

• Andi Last introduces the concept of a bridge account, highlighting its utility in facilitating seamless transitions between early retirement and accessing traditional retirement funds.

  [29:45] Big Al Clopine: "At age 55, if you can work till age 55, you have full access to your Roth 401K and your traditional 401K without penalty."

Key Takeaways:

• Maximize Roth contributions early in high-earning years to capitalize on tax-free growth.
• Establish a bridge account to cover expenses during the early retirement phase, reducing the need to draw from retirement accounts prematurely.
• Understand IRS rules regarding early access to retirement funds to avoid penalties.

4. Mortgage Payoff and Tax Efficiency of Investments

Listener Profile:

• Frenchie from Maine, a new homeowner, seeks guidance on the financial implications of aggressively paying off her mortgage and the tax efficiency between money market funds and bond funds.

Discussion Highlights:

• Frenchie contemplates whether paying off her mortgage early offers any tax or wealth disadvantages, especially since she doesn't itemize deductions.

  [33:58] Big Al Clopine: "There's no tax advantage of keeping that mortgage or aggressively paying it off. Because she's got the standard deduction, right?"

• The hosts recommend ensuring robust emergency funds and adequate contributions to retirement accounts before allocating excess funds towards mortgage repayment.

  [34:04] Andi Last: "So make sure you have your emergency fund set aside. Make sure you're saving appropriately for your retirement accounts."

• On the topic of investment vehicles, they clarify that money market funds and bond funds are taxed similarly unless the bonds are municipal, which may offer tax advantages depending on the investor's tax bracket.

  [35:21] Andi Last: "They're both taxed the same way, unless it's a municipal bond, which is tax free."

Key Takeaways:

• Prioritize building an emergency fund and retirement savings before aggressively paying down a mortgage.
• Assess the interest rate of the mortgage versus potential investment returns to determine the optimal financial strategy.
• Choose investment vehicles based on tax efficiency and financial goals, considering options like municipal bonds for tax-free income.

5. Notable Quotes

• Big Al Clopine on balancing Roth conversions:

  [14:13] Big Al Clopine: "You could probably have maybe half of that in Roth, half of that in traditional."

• Andi Last on tax planning flexibility:

  [12:37] Andi Last: "But I just think you have to be a little bit careful. You don't want to go too far here."

• Joe Anderson emphasizing retirement barriers:

  [16:03] Joe Anderson: "The top three barriers to retirement for most people are not having enough retirement savings, not having a formal plan, and overspending."

6. Hosts' Expert Analysis and Recommendations

Throughout the episode, Joe and Big Al meticulously dissect each listener's financial scenario, offering tailored advice grounded in fiscal responsibility and strategic tax planning. Their discussions highlight the importance of:

• Tax Bracket Management: Carefully navigating tax brackets to minimize liabilities while maximizing retirement savings.

• Diversification and Liquidity: Maintaining a diversified portfolio to ensure liquidity and flexibility in financial planning.

• Strategic Roth Conversions: Timing Roth conversions to align with periods of lower taxable income, thereby optimizing tax-free growth.

• Early Retirement Considerations: Utilizing bridge accounts and understanding IRS regulations to facilitate a smooth transition into early retirement without unnecessary penalties or tax burdens.

7. Conclusion and Next Episode Teaser

In wrapping up, the hosts briefly touch upon upcoming topics, hinting at deep dives into asset allocation, municipal bonds, and more listener-centric financial strategies.

[36:16] Joe Anderson: "Next week, Joe and Big Al spitball on rebalancing your asset allocation, muni bonds in a brokerage account and Emergency funds for D TJ in St. Louis..."

Final Thoughts:

This episode serves as an invaluable resource for individuals grappling with complex financial decisions, particularly those related to Roth conversions and tax-efficient investing. Joe Anderson and Big Al Clopine adeptly blend technical expertise with relatable discourse, making intricate financial concepts accessible and actionable for their audience.

For personalized advice and to explore your own financial blueprint, visit YourMoneyYourWealth.com.