WEBVTT
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So picture this.
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You did everything right.
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You worked with your CPA, you converted a chunk of your IRA to a Roth, you paid the tax, and you felt good about it.
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Two years go by.
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You've forgotten all about it.
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The letter shows up from Social Security telling you that your Medicare premiums are going up for you and your spouse for the whole year.
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Nothing changed in your life.
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So what happened?
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What happened is a decision you made two years ago just sent you the bill.
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Today we're talking about Roth conversion mistakes that show up two years later.
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So, you know, a lot of times we more than ever we get this question about Roth conversions.
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And you know, Roth conversions can be a very, very powerful tool.
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A strategic Roth conversion strategy can be an incredibly powerful tool to help you save taxes in retirement.
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Yep.
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And there is no doubt about that.
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But they aren't right for everybody.
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No.
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And you need to be careful with this because it is a complex decision and one that you shouldn't just be making, you know, shooting from the hip.
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This is a, you know, this is a decision with a lot of moving parts.
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And you need to understand all of the thresholds and things that are in place if you're going to do this.
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And really understand that there is a very optimal way to go about this whole process.
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But generally it comes down to, you know, the question of do you think taxes are going up in the future?
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Yeah.
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It's a fair starting point.
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Yeah.
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And, you know, we ask that question a lot when we're doing live events with with um clients.
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And almost every hand in the room goes up when we we say, you know, do you think taxes are who thinks taxes aren't going up in the future?
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Um, did I say that right?
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Other way around, but yeah.
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Okay.
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Nobody thinks taxes are gonna go down.
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Everybody thinks taxes are only going up in the future.
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So, you know, it's it's common, you know, everybody feels that way and and and I get that.
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Um so if you feel that way, if you're in agreement with us and and the way that that we see that whole thing happening, then could it possibly make sense for as it makes sense to take amounts of money that are in IRAs, 401ks, you know, 403Bs, whatever pre-tax accounts, and go ahead and bite the bullet on that money, pay the taxes now, and move that money over to a Roth account where that money can grow in a tax-free environment.
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You never have to take required minimum distributions off of it.
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It can just grow and grow, and you never have to pay taxes on that money again.
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It's a pretty, pretty simple thesis, Stuart.
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And you know, we always we start with that question all the time.
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And, you know, if you don't, if you haven't really thought about it, tax rates in the future.
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I mean, we always like to say we're up to what 40 trillion almost in debt.
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And if you look at the last 100 years, you know, we used to share this chart a lot.
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The highest tax rate is historically pretty low.
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I mean, we've seen, granted, it was in the 1930s and 40s, but we've seen, you know, 80 plus percent be the highest tax bracket.
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Right now it's 37.
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Um, so you've got that.
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And we also have a lot of, you know, the standard deduction is extremely high.
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I mean, it's pushing$40,000 with the new one big beautiful bill.
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So we have, you know, standard deductions are very high.
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We have the highest tax bracket is relatively low compared to the past.
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So when you factor in the debt, we got to do something, right?
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At some point, some administration is gonna have to figure out a way to stop this snowball or else it's just this unescapable debt.
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So we got to do something.
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And if we're under that impression, it's you know, it's kind of that a lot of times we see people come in and they'll just map out, you know, if I pay 20% now or 20% later, what's it doesn't really change anything, but that's not usually what happens, is it?
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No, and I always it always kind of boggles my mind when we see that, because we have had engineers and those very highly technical people come in with some sort of spreadsheet where they are, you know, mapping it out like, hey, if I pay, you know, 28% on it now, um, and then put it into a Roth and it grows at the same exact rate as the IRA, and then I pull it out later and I have to pay you know 20% on it.
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You know, they do in all these kind of break-even analysis, and you know, it's really kind of interesting to me because there's a fundamental flaw in that entire way of thinking, in that the whole point in doing the Roth conversion and going ahead and paying the taxes on that money is that you are going, it's going to undeniably put you into a lower tax bracket later down the road.
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And therefore, it that whole analysis goes out the window because that is the whole point to it.
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And you know, if if you don't you can't understand that, then you know, we'll break it down for you very simply.
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If you are in a 25% tax bracket today, and you are, you know, you have a ton of pre-tax money that's in an IRA, a million dollars.
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We'll we'll just go with that, and you start to take it out and pay, you know, keep yourself in that, you know, 25% tax bracket in that, you know, that that range.
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Um, and but you, you know, let's say that you've got some room in your tax bracket before you get to the next, you know, to 32% or whatever it is.
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And so you can kind of fill up that tax bracket with pre-tax money, go ahead and pay the taxes on it at the same tax rate as the other stuff that you got.
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And then you can get that over into a Roth account where it grows tax-free.
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If you leave it in the IRA, it's growing taxable.
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Right.
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Like there, there's one huge factor right there.
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So, yeah, the account's growing, but you know, a third of that money is not yours, right?
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So you're growing taxable.
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As opposed to that, going ahead and paying the the the you know 25% or whatever on the money, getting it into a Roth account where now it's going to grow tax-free.
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Then when you are in retirement, if you've gotten all that money out of the IRA over to a Roth IRA, then I don't care what your other income sources are.
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I don't care if you've got pensions or social security, I don't, it doesn't matter.
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You're going to be in a lower tax bracket than you were before.
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And so that's where the real benefit comes in.
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And people just, it's so hard to get that concept and to to really grasp that concept and understand that that that's the way it works.
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If done correctly, you could actually put yourself into not only a position where you're in a much lower tax bracket, you could put yourself in a situation where you're tax free in retirement to where you're not even paying taxes on your social security if you do it correctly.
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And we have seen that.
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So you could go from, you know, a decent 22-25% tax bracket, you know, a factive tax rate, down to nothing at at some point in retirement.
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And how good would that feel?
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That's just the coolest thing ever when we see it play out.
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Yeah.
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Yeah, you have to file a tax certificate.
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You don't even have to do that.
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Right.
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Right.
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So um, you know, Roth conversions can be extremely powerful, extremely powerful and how they work, but there are some moving parts, and let's talk about that.
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There's a lot, right?
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So, so the first one that comes to mind is um something called Irma.
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And that's what we were talking about in the opening of the show.
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So IRMA, which is basically the way this thing works is when you're working, you're paying into Medicare.
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And as long as you've worked 10 years in this country full-time, then you've earned enough credits and paid enough into Medicare to qualify for your part A of Medicare when you turn 65 and you enroll.
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Your part A you've paid into and you've basically prepaid the premium for that.
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So you don't pay one going forward.
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Part B is a different story.
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Part B is a different animal.
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So part A of Medicare pays about 80% of your hospital bills, and part B pays about 80% of your doctor's bills outside of the hospital.
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Now, everybody in this country pays a premium for part B.
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And for most people in this country, that's about$202 a month.
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But what a lot of people don't understand is that that part B premium for Medicare is income-based.
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And that really catches people off guard.
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That is income-based, not only part B, but part D, the drug card, those are income-based premiums.
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The more income you have, the higher the premium is on that particular piece of Medicare.
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So why does that matter when you're looking at Roth conversions?
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Well, the way that the government determines that Part B premium, and if you're going to pay more than everybody else pays, which the term is that's used to, you know, refer to people who pay more than the standard$202 a month, is IRMA.
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And I don't Mitch It's income-related monthly adjustment amount.
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Okay.
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There you go.
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There you go.
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I wasn't even going to attempt that.
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So I call it IRMA.
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And IRMA is, you know, something that the government, the way they determine that premium is they're going to look back at your tax returns from two years ago, and they're going to do that every year.
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So every year they look back two years at your tax returns.
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So let me give you an example of how this could work.
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We had a gentleman in the office this year that was turning 65.
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He and his wife were both turning 65 and were signing up for Medicare.
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And he had done a very, very large Roth conversion at the recommendation of his financial advisor at age 63.
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He is 65 now, but he did the conversion at age 63.
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Now what people need to understand is when you do a Roth conversion, that money that you convert is considered income in the year that you do the conversion.
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Right?
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So if you did a very large Roth conversion at age 63, and then you go to sign up for Medicare at age 65, and you and your spouse are both turning 65 in the same month, like this gentleman, and you get told by Medicare that instead of the$202 a month each that you were paying, or that you thought you would be paying, that now you're going to be paying upwards of$680 a month each for part B of Medicare, you can see how that could be a problem.
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Yeah.
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That payment would go for one year because in if you didn't do continue to do very large Roth conversions, then that payment would last for one year.
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The elevated Irma would hit you for one year, and you'd have to pay that higher premium, and then it would go back down to the 202.
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But and and listen, you know, this guy could afford it.
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Yeah.
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This guy had done extremely well for himself, and he could afford it.
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And even with Irma, even with the penalty and having to pay the higher premiums for he and his spouse, the the Roth conversion still made sense.
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It's still going to benefit them more than what Irma will cost them each for one year.
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But that is not the point.
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The point is he did not know.
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His advisor did not tell him.
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They did not have this conversation.
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And so he was mad and he should be mad.
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Like you need to know these things, and you need to understand that that impacts the overall, you know, benefit of doing a Roth conversion is you have to also understand if Irma's going to apply, and there's many different thresholds.
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Um, I think four tiers on the first.
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Yeah, five.
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Five tiers.
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So, you know, the the first tier starts, you know, you first of all, you have to either be over, I believe it's 109 for a single person, 109,000 a year for the for a single person and and 218 a year, I believe, now for a married couple to even get into this next tier.
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So so that's a good bit of income.
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And most people aren't going to be over that unless they're doing like a large Roth conversion.
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You know, the other thing that can bite you is if you have some huge, you know, capital gain that you realize in that year at 63.
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Um, say you sold a big piece of real estate that had appreciated dramatically and you had to realize some huge capital gain in your taxes.
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Um, there's some other things, you know, you took a big bonus that you know stock option payments or something.
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Something.
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Yeah, you know, just that's up a lot.
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Be careful with that because, you know, you need to understand that.
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Um, and and again, most of the time, it's probably still gonna make sense for you.
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But but again, you you you know, what you don't know can hurt you.
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And so, Irma, understand those thresholds, understand if you're gonna hit them, understand if it's gonna cost you two years from now so that you don't get caught off guard like this gentleman was.
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And I can tell you that, you know, it's it when when that happens, you feel very um, you know, you feel like you not not that you were necessarily deceived, but you just weren't given all the information.
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And that's never good.
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You just don't want to be caught off guard like that.
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No, that's Irma's the big one.
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And the other thing people are getting caught off guard with right now, probably the most important for the next couple of years, is managing that new standard deduction.
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So, you know, for the next few years, we've got with the one big beautiful bill, we talked about it a lot, we've got an extra six thousand dollar standard deduction for seniors.
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And it's, you know, six thousand per cup per person.
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So it can be good twelve thousand for a married couple.
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Now, what happened a lot last year is a lot of people got that standard deduction on their taxes and it was great.
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But the people, some people showed up to their office and you know, their CPA told them, oh, you would have gotten an extra$12,000, but you were just over the threshold for this.
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And the way it works is it's$75,000 for a single filer and$150,000 modified adjusted gross income for a married couple.
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And it phases out up to about$200 for a married couple.
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But, you know, if you go over that, you start losing that standard deduction.
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And again, just like Irma, we're not saying don't do a Roth conversion because of these things, but you have to look through this because some people just went over the threshold and they could have just kept the conversion at 145, you know, kept their income at 145, for example, and stayed just under.
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So these are a couple of things that, you know, probably still will make sense in the long run, but you've got to map through these things and you got to have a team that can sit there and look at all these different thresholds because that feeling isn't fun.
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When you show up to the tax office and you're like, dang, if I had just done$10,000 less of a conversion, I could have an extra$12,000 standard deduction.
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So it's these sort of things that people don't think through when they just do math on you know percentages.
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And this is the kind of things that we can help with.
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And it's really it helps you avoid frustrating conversations.
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Like you said, you don't you don't feel deceived necessarily, but you feel like, dang, I missed out on something that is only around for a little bit.
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And it's uh it's frustrating, right?
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And you just you it's the kind of mistakes that we help you avoid.
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Yeah.
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I mean, that one big beautiful bill, extra standard deduction is around till 2028.
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So we've got a couple more years of that.
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And you know, what better time with that extra standard deduction to be really, really taking a good look at these these Roth conversion strategies and um determining whether it makes sense for you.
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Um, I can tell you though, people just get these things wrong.
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It's easy, it's easy to do.
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They get it wrong, and I'll tell you another place where they get it wrong is they don't consider the standard deduction.
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Right.
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And they think, oh, I just don't have room because they're not even thinking about they're just looking at pure gross income and they're not thinking, oh my gosh, I I forgot I get a thirty thousand dollar, you know, plus standard deduction here, which you know, people just get this stuff wrong.
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And it's you know, I highly encourage you that like if you are, you know, this is something you really because it can like I mean we've seen cases here where a good Roth conversion strategy could save you hundreds of dollars millions of dollars in retirement.
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I mean, it can be a hugely powerful tool.
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And that's even hitting Irma thresholds and you know, not getting all of the big beautiful bill if that's what it means.
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But but you have to you have to model these things out for kind of life expectancy to be able to truly see, okay, so doing the Roth conversion versus not doing the Roth conversion.
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Like if I don't do the Roth conversion, what does that look like?
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Yeah.
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So now my IRA continues just to grow.
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And at some point I'm gonna hit required minimum distribution age, which you know is a little different for everybody.
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I'm 73, Mitch is gonna be 75 or more.
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Um, but you know, once you get to that place, you know, the government's forcing you to take a percentage of that IRA every year and pay the taxes on it.
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And what that can do is, you know, because that IRA has grown so substantially up until that time, that can be enough money alone right there to push you in back, you know, into IRMA if you weren't in it, you know, had hadn't done the Roth conversions, and then you're in IRMA longer on the back end, you know, from required minimum distribution age till the age that you pass, that you end up paying way more, you know, higher Part B premiums than you would have just doing the Roth conversions and take and getting an IRMA hit early on.
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And so this isn't a you know, this is a long big picture decision.
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This is not a you know, short micro, you know, planning decision here.
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And in order to really get your arms around that big picture and to really have it be correct and and taking into consideration Irma, you know, a pretty, you know, a reasonable growth rate on those accounts.
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Um one big beautiful bill thresholds with the extra standard deduction, tax bracket management and understanding, you know, where you're going to hit those thresholds.
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And, you know, standard deduction, taking that in consideration, not to mention inflation and and all of those things.
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You know, we can actually really we have ways to model that where it's as accurate as you could possibly be today and really give you the guidance to optimize and understand, you know, that that's you know that we're we're looking at everything.
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Like we're looking at all the moving parts and we see everything.
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And so if you if you're just doing this in a vacuum, if you're just doing this looking at kind of one little break-even analysis or something, you're gonna mess this up and it's not going to make a lot of sense to you.
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But do just understand the real basic concept of getting paying the taxes on it now puts you in a lower tax bracket later.
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That's the biggest takeaway from all this period.
00:23:42.180 --> 00:23:42.899
That's just it.
00:23:43.220 --> 00:23:50.419
And how powerful that can that be as you get older to be paying less and less and less taxes.
00:23:50.579 --> 00:23:51.859
I mean that's that's huge.
00:23:52.980 --> 00:24:17.940
And so you know getting yourself in that situation and that kind of golden window between the day you retire and the day that you have to take required minimum distributions, if there's a way to go ahead and get all of that pre-tax money converted to Roth money prior to having to take required minimum distributions, then you won, right?
00:24:18.019 --> 00:24:19.220
Like you won the war.
00:24:19.619 --> 00:24:20.099
That's it.
00:24:20.339 --> 00:24:32.659
And you are in great shape going forward potentially in a tax-free environment because if all your income is is Social Security and Roth, you're not paying taxes.
00:24:34.019 --> 00:25:18.899
So give this some thought guys I mean give this some real thought and if you're not sure and you don't feel confident about being able to to really make this choice and make this decision but you know that this could benefit you and you know deep down in your soul that this is probably something you need to be doing, you know, come to ClearpathRetirement.com you know shoot us a message let us know um that you are interested and that you want to talk with our team about it and have us run some scenarios for you, have us model some stuff out for you and really get you clear on this and we can certainly help with that and we'd love to have that conversation.
00:25:19.299 --> 00:25:24.579
We would we would one other quick point I want to add uh you know tax bracket management is harder than ever.
00:25:24.659 --> 00:25:25.700
We talk about it all the time.
00:25:25.859 --> 00:25:34.819
One other place people mess up and I just want to point this out especially right now with interest rates being so high and everyone's getting a lot of fixed income is dividends and interest.
00:25:34.980 --> 00:25:40.500
You know, we always start with the tax return and it's so important to have professionals look at this when you're trying to do these conversions.
00:25:40.740 --> 00:25:48.180
I've seen this so often in the last few years where you know people look at just their pension, their social security and like that's 70,000.
00:25:48.259 --> 00:25:53.539
So I've got another 50 I can, you know, they're and then they put the Roth conversion money in there too.
00:25:53.779 --> 00:26:00.339
But so often people have these you know after tax accounts where you're paying taxes on the dividends and interest that you're receiving.
00:26:00.579 --> 00:26:12.819
And with again with interest rates being so high, sometimes we see people come in from other offices or they're just managing money themselves and they've got a large brokerage account and they're having to pay$30,$40,000 in interest and dividends.
00:26:12.899 --> 00:26:14.099
That goes right on the tax return.
00:26:14.180 --> 00:26:16.740
That's going to count in your income that's just ordinary income.
00:26:16.899 --> 00:26:26.819
So make sure you're factoring that in too it's more important now than it has been the last 10 years because we're at all time high not all time high but you know high uh interest rates for the past 10 years.
00:26:26.980 --> 00:26:28.339
So you keep that in mind.
00:26:28.579 --> 00:26:32.259
Make sure you're looking at the dividends and interest because that's a huge mistake people are making right now.
00:26:32.659 --> 00:26:34.099
Man that's an excellent point.
00:26:34.740 --> 00:26:42.339
Excellent point another place we do see people mess up quite often is they're not taking that those those capital gains into consideration.
00:26:42.579 --> 00:26:56.019
Yeah capital gains any of that stuff so all right well listen I I think you know we've made our point clear here clear here today and um really enjoyed this one.
00:26:56.259 --> 00:27:14.579
Hope you guys enjoyed it please join us each week as we bring you more information like this really good nuggets for you guys to to help you whether you ever you know talk to us or not we want to help you we want to make sure that we're putting things on your radar that actually make a difference.
00:27:15.059 --> 00:27:20.899
So until next week you guys happy trails and happy retirement
00:00:02.160 --> 00:00:03.439
So picture this.
00:00:03.680 --> 00:00:05.200
You did everything right.
00:00:05.440 --> 00:00:13.359
You worked with your CPA, you converted a chunk of your IRA to a Roth, you paid the tax, and you felt good about it.
00:00:13.759 --> 00:00:15.519
Two years go by.
00:00:15.759 --> 00:00:17.519
You've forgotten all about it.
00:00:17.760 --> 00:00:27.679
The letter shows up from Social Security telling you that your Medicare premiums are going up for you and your spouse for the whole year.
00:00:28.399 --> 00:00:30.399
Nothing changed in your life.
00:00:30.719 --> 00:00:32.079
So what happened?
00:00:32.640 --> 00:00:38.079
What happened is a decision you made two years ago just sent you the bill.
00:00:38.560 --> 00:00:43.840
Today we're talking about Roth conversion mistakes that show up two years later.
00:00:44.799 --> 00:00:54.719
So, you know, a lot of times we more than ever we get this question about Roth conversions.
00:00:55.119 --> 00:01:00.640
And you know, Roth conversions can be a very, very powerful tool.
00:01:01.119 --> 00:01:08.560
A strategic Roth conversion strategy can be an incredibly powerful tool to help you save taxes in retirement.
00:01:08.719 --> 00:01:09.040
Yep.
00:01:10.239 --> 00:01:13.359
And there is no doubt about that.
00:01:13.680 --> 00:01:15.920
But they aren't right for everybody.
00:01:16.079 --> 00:01:16.400
No.
00:01:16.959 --> 00:01:29.519
And you need to be careful with this because it is a complex decision and one that you shouldn't just be making, you know, shooting from the hip.
00:01:29.760 --> 00:01:34.879
This is a, you know, this is a decision with a lot of moving parts.
00:01:35.439 --> 00:01:41.680
And you need to understand all of the thresholds and things that are in place if you're going to do this.
00:01:42.159 --> 00:01:49.439
And really understand that there is a very optimal way to go about this whole process.
00:01:50.319 --> 00:01:59.280
But generally it comes down to, you know, the question of do you think taxes are going up in the future?
00:01:59.599 --> 00:02:00.079
Yeah.
00:02:00.400 --> 00:02:01.599
It's a fair starting point.
00:02:01.680 --> 00:02:01.920
Yeah.
00:02:03.200 --> 00:02:11.599
And, you know, we ask that question a lot when we're doing live events with with um clients.
00:02:12.159 --> 00:02:23.759
And almost every hand in the room goes up when we we say, you know, do you think taxes are who thinks taxes aren't going up in the future?
00:02:24.000 --> 00:02:25.280
Um, did I say that right?
00:02:25.520 --> 00:02:26.400
Other way around, but yeah.
00:02:26.639 --> 00:02:26.800
Okay.
00:02:27.439 --> 00:02:29.120
Nobody thinks taxes are gonna go down.
00:02:31.120 --> 00:02:34.240
Everybody thinks taxes are only going up in the future.
00:02:34.800 --> 00:02:42.960
So, you know, it's it's common, you know, everybody feels that way and and and I get that.
00:02:43.520 --> 00:03:27.680
Um so if you feel that way, if you're in agreement with us and and the way that that we see that whole thing happening, then could it possibly make sense for as it makes sense to take amounts of money that are in IRAs, 401ks, you know, 403Bs, whatever pre-tax accounts, and go ahead and bite the bullet on that money, pay the taxes now, and move that money over to a Roth account where that money can grow in a tax-free environment.
00:03:27.840 --> 00:03:31.199
You never have to take required minimum distributions off of it.
00:03:31.360 --> 00:03:36.639
It can just grow and grow, and you never have to pay taxes on that money again.
00:03:37.039 --> 00:03:39.199
It's a pretty, pretty simple thesis, Stuart.
00:03:39.280 --> 00:03:42.000
And you know, we always we start with that question all the time.
00:03:42.159 --> 00:03:46.000
And, you know, if you don't, if you haven't really thought about it, tax rates in the future.
00:03:46.080 --> 00:03:50.560
I mean, we always like to say we're up to what 40 trillion almost in debt.
00:03:50.879 --> 00:03:54.719
And if you look at the last 100 years, you know, we used to share this chart a lot.
00:03:54.879 --> 00:03:57.599
The highest tax rate is historically pretty low.
00:03:57.759 --> 00:04:04.240
I mean, we've seen, granted, it was in the 1930s and 40s, but we've seen, you know, 80 plus percent be the highest tax bracket.
00:04:04.400 --> 00:04:05.439
Right now it's 37.
00:04:05.680 --> 00:04:06.560
Um, so you've got that.
00:04:06.639 --> 00:04:09.759
And we also have a lot of, you know, the standard deduction is extremely high.
00:04:09.919 --> 00:04:13.680
I mean, it's pushing$40,000 with the new one big beautiful bill.
00:04:13.840 --> 00:04:16.399
So we have, you know, standard deductions are very high.
00:04:16.560 --> 00:04:20.560
We have the highest tax bracket is relatively low compared to the past.
00:04:20.800 --> 00:04:23.199
So when you factor in the debt, we got to do something, right?
00:04:23.439 --> 00:04:30.319
At some point, some administration is gonna have to figure out a way to stop this snowball or else it's just this unescapable debt.
00:04:30.399 --> 00:04:31.360
So we got to do something.
00:04:31.519 --> 00:04:45.519
And if we're under that impression, it's you know, it's kind of that a lot of times we see people come in and they'll just map out, you know, if I pay 20% now or 20% later, what's it doesn't really change anything, but that's not usually what happens, is it?
00:04:46.240 --> 00:05:21.360
No, and I always it always kind of boggles my mind when we see that, because we have had engineers and those very highly technical people come in with some sort of spreadsheet where they are, you know, mapping it out like, hey, if I pay, you know, 28% on it now, um, and then put it into a Roth and it grows at the same exact rate as the IRA, and then I pull it out later and I have to pay you know 20% on it.
00:05:21.519 --> 00:05:51.920
You know, they do in all these kind of break-even analysis, and you know, it's really kind of interesting to me because there's a fundamental flaw in that entire way of thinking, in that the whole point in doing the Roth conversion and going ahead and paying the taxes on that money is that you are going, it's going to undeniably put you into a lower tax bracket later down the road.
00:05:53.279 --> 00:06:01.279
And therefore, it that whole analysis goes out the window because that is the whole point to it.
00:06:01.759 --> 00:06:07.759
And you know, if if you don't you can't understand that, then you know, we'll break it down for you very simply.
00:06:08.000 --> 00:06:21.680
If you are in a 25% tax bracket today, and you are, you know, you have a ton of pre-tax money that's in an IRA, a million dollars.
00:06:21.839 --> 00:06:36.560
We'll we'll just go with that, and you start to take it out and pay, you know, keep yourself in that, you know, 25% tax bracket in that, you know, that that range.
00:06:37.199 --> 00:06:47.519
Um, and but you, you know, let's say that you've got some room in your tax bracket before you get to the next, you know, to 32% or whatever it is.
00:06:47.920 --> 00:06:58.000
And so you can kind of fill up that tax bracket with pre-tax money, go ahead and pay the taxes on it at the same tax rate as the other stuff that you got.
00:06:58.480 --> 00:07:03.839
And then you can get that over into a Roth account where it grows tax-free.
00:07:04.000 --> 00:07:07.199
If you leave it in the IRA, it's growing taxable.
00:07:07.279 --> 00:07:07.519
Right.
00:07:07.680 --> 00:07:10.720
Like there, there's one huge factor right there.
00:07:10.959 --> 00:07:17.040
So, yeah, the account's growing, but you know, a third of that money is not yours, right?
00:07:17.120 --> 00:07:18.879
So you're growing taxable.
00:07:19.759 --> 00:07:29.279
As opposed to that, going ahead and paying the the the you know 25% or whatever on the money, getting it into a Roth account where now it's going to grow tax-free.
00:07:30.240 --> 00:07:42.560
Then when you are in retirement, if you've gotten all that money out of the IRA over to a Roth IRA, then I don't care what your other income sources are.
00:07:42.720 --> 00:07:46.240
I don't care if you've got pensions or social security, I don't, it doesn't matter.
00:07:46.720 --> 00:07:52.160
You're going to be in a lower tax bracket than you were before.
00:07:52.560 --> 00:07:56.319
And so that's where the real benefit comes in.
00:07:56.879 --> 00:08:08.240
And people just, it's so hard to get that concept and to to really grasp that concept and understand that that that's the way it works.
00:08:08.639 --> 00:08:28.959
If done correctly, you could actually put yourself into not only a position where you're in a much lower tax bracket, you could put yourself in a situation where you're tax free in retirement to where you're not even paying taxes on your social security if you do it correctly.
00:08:29.120 --> 00:08:30.399
And we have seen that.
00:08:30.639 --> 00:08:44.720
So you could go from, you know, a decent 22-25% tax bracket, you know, a factive tax rate, down to nothing at at some point in retirement.
00:08:44.799 --> 00:08:46.080
And how good would that feel?
00:08:46.320 --> 00:08:48.639
That's just the coolest thing ever when we see it play out.
00:08:48.720 --> 00:08:48.799
Yeah.
00:08:48.960 --> 00:08:50.559
Yeah, you have to file a tax certificate.
00:08:50.960 --> 00:08:52.080
You don't even have to do that.
00:08:52.159 --> 00:08:52.320
Right.
00:08:52.639 --> 00:08:53.039
Right.
00:08:53.279 --> 00:09:04.320
So um, you know, Roth conversions can be extremely powerful, extremely powerful and how they work, but there are some moving parts, and let's talk about that.
00:09:04.879 --> 00:09:06.000
There's a lot, right?
00:09:06.320 --> 00:09:12.399
So, so the first one that comes to mind is um something called Irma.
00:09:12.960 --> 00:09:16.159
And that's what we were talking about in the opening of the show.
00:09:16.320 --> 00:09:28.320
So IRMA, which is basically the way this thing works is when you're working, you're paying into Medicare.
00:09:28.639 --> 00:09:43.840
And as long as you've worked 10 years in this country full-time, then you've earned enough credits and paid enough into Medicare to qualify for your part A of Medicare when you turn 65 and you enroll.
00:09:44.080 --> 00:09:49.039
Your part A you've paid into and you've basically prepaid the premium for that.
00:09:49.200 --> 00:09:51.600
So you don't pay one going forward.
00:09:52.559 --> 00:09:54.559
Part B is a different story.
00:09:54.720 --> 00:09:56.159
Part B is a different animal.
00:09:56.320 --> 00:10:09.440
So part A of Medicare pays about 80% of your hospital bills, and part B pays about 80% of your doctor's bills outside of the hospital.
00:10:09.759 --> 00:10:15.279
Now, everybody in this country pays a premium for part B.
00:10:16.480 --> 00:10:21.279
And for most people in this country, that's about$202 a month.
00:10:22.320 --> 00:10:30.159
But what a lot of people don't understand is that that part B premium for Medicare is income-based.
00:10:30.639 --> 00:10:33.679
And that really catches people off guard.
00:10:34.080 --> 00:10:43.279
That is income-based, not only part B, but part D, the drug card, those are income-based premiums.
00:10:43.840 --> 00:10:51.759
The more income you have, the higher the premium is on that particular piece of Medicare.
00:10:52.799 --> 00:10:57.519
So why does that matter when you're looking at Roth conversions?
00:10:58.080 --> 00:11:19.440
Well, the way that the government determines that Part B premium, and if you're going to pay more than everybody else pays, which the term is that's used to, you know, refer to people who pay more than the standard$202 a month, is IRMA.
00:11:19.759 --> 00:11:39.699
And I don't Mitch It's income-related monthly adjustment amount.
00:11:39.939 --> 00:11:40.179
Okay.
00:11:40.339 --> 00:11:40.899
There you go.
00:11:40.979 --> 00:11:41.459
There you go.
00:11:41.699 --> 00:11:43.219
I wasn't even going to attempt that.
00:11:44.179 --> 00:11:45.939
So I call it IRMA.
00:11:46.419 --> 00:12:02.500
And IRMA is, you know, something that the government, the way they determine that premium is they're going to look back at your tax returns from two years ago, and they're going to do that every year.
00:12:02.819 --> 00:12:08.339
So every year they look back two years at your tax returns.
00:12:08.579 --> 00:12:12.339
So let me give you an example of how this could work.
00:12:13.699 --> 00:12:19.699
We had a gentleman in the office this year that was turning 65.
00:12:19.939 --> 00:12:25.859
He and his wife were both turning 65 and were signing up for Medicare.
00:12:26.899 --> 00:12:38.659
And he had done a very, very large Roth conversion at the recommendation of his financial advisor at age 63.
00:12:39.699 --> 00:12:45.539
He is 65 now, but he did the conversion at age 63.
00:12:46.339 --> 00:12:57.219
Now what people need to understand is when you do a Roth conversion, that money that you convert is considered income in the year that you do the conversion.
00:12:58.579 --> 00:12:59.219
Right?
00:12:59.779 --> 00:13:43.939
So if you did a very large Roth conversion at age 63, and then you go to sign up for Medicare at age 65, and you and your spouse are both turning 65 in the same month, like this gentleman, and you get told by Medicare that instead of the$202 a month each that you were paying, or that you thought you would be paying, that now you're going to be paying upwards of$680 a month each for part B of Medicare, you can see how that could be a problem.
00:13:44.099 --> 00:13:44.740
Yeah.
00:13:45.219 --> 00:13:57.939
That payment would go for one year because in if you didn't do continue to do very large Roth conversions, then that payment would last for one year.
00:13:58.099 --> 00:14:07.059
The elevated Irma would hit you for one year, and you'd have to pay that higher premium, and then it would go back down to the 202.
00:14:08.500 --> 00:14:12.579
But and and listen, you know, this guy could afford it.
00:14:12.659 --> 00:14:13.139
Yeah.
00:14:13.459 --> 00:14:18.500
This guy had done extremely well for himself, and he could afford it.
00:14:18.659 --> 00:14:29.459
And even with Irma, even with the penalty and having to pay the higher premiums for he and his spouse, the the Roth conversion still made sense.
00:14:29.620 --> 00:14:36.179
It's still going to benefit them more than what Irma will cost them each for one year.
00:14:36.979 --> 00:14:39.379
But that is not the point.
00:14:39.620 --> 00:14:42.500
The point is he did not know.
00:14:43.219 --> 00:14:45.459
His advisor did not tell him.
00:14:45.620 --> 00:14:48.019
They did not have this conversation.
00:14:48.740 --> 00:14:52.019
And so he was mad and he should be mad.
00:14:52.179 --> 00:15:12.339
Like you need to know these things, and you need to understand that that impacts the overall, you know, benefit of doing a Roth conversion is you have to also understand if Irma's going to apply, and there's many different thresholds.
00:15:12.500 --> 00:15:14.259
Um, I think four tiers on the first.
00:15:14.500 --> 00:15:15.139
Yeah, five.
00:15:15.379 --> 00:15:15.939
Five tiers.
00:15:17.539 --> 00:15:41.139
So, you know, the the first tier starts, you know, you first of all, you have to either be over, I believe it's 109 for a single person, 109,000 a year for the for a single person and and 218 a year, I believe, now for a married couple to even get into this next tier.
00:15:41.379 --> 00:15:44.740
So so that's a good bit of income.
00:15:44.899 --> 00:15:50.740
And most people aren't going to be over that unless they're doing like a large Roth conversion.
00:15:50.979 --> 00:16:00.500
You know, the other thing that can bite you is if you have some huge, you know, capital gain that you realize in that year at 63.
00:16:00.979 --> 00:16:10.099
Um, say you sold a big piece of real estate that had appreciated dramatically and you had to realize some huge capital gain in your taxes.
00:16:10.339 --> 00:16:15.620
Um, there's some other things, you know, you took a big bonus that you know stock option payments or something.
00:16:15.859 --> 00:16:16.099
Something.
00:16:16.179 --> 00:16:17.859
Yeah, you know, just that's up a lot.
00:16:18.099 --> 00:16:21.459
Be careful with that because, you know, you need to understand that.
00:16:21.539 --> 00:16:26.819
Um, and and again, most of the time, it's probably still gonna make sense for you.
00:16:26.899 --> 00:16:30.500
But but again, you you you know, what you don't know can hurt you.
00:16:30.740 --> 00:16:42.339
And so, Irma, understand those thresholds, understand if you're gonna hit them, understand if it's gonna cost you two years from now so that you don't get caught off guard like this gentleman was.
00:16:42.740 --> 00:16:57.379
And I can tell you that, you know, it's it when when that happens, you feel very um, you know, you feel like you not not that you were necessarily deceived, but you just weren't given all the information.
00:16:57.539 --> 00:16:59.139
And that's never good.
00:16:59.459 --> 00:17:01.379
You just don't want to be caught off guard like that.
00:17:01.539 --> 00:17:03.539
No, that's Irma's the big one.
00:17:03.620 --> 00:17:10.980
And the other thing people are getting caught off guard with right now, probably the most important for the next couple of years, is managing that new standard deduction.
00:17:11.220 --> 00:17:19.779
So, you know, for the next few years, we've got with the one big beautiful bill, we talked about it a lot, we've got an extra six thousand dollar standard deduction for seniors.
00:17:19.940 --> 00:17:21.940
And it's, you know, six thousand per cup per person.
00:17:22.019 --> 00:17:24.339
So it can be good twelve thousand for a married couple.
00:17:24.579 --> 00:17:29.379
Now, what happened a lot last year is a lot of people got that standard deduction on their taxes and it was great.
00:17:29.700 --> 00:17:37.940
But the people, some people showed up to their office and you know, their CPA told them, oh, you would have gotten an extra$12,000, but you were just over the threshold for this.
00:17:38.099 --> 00:17:46.019
And the way it works is it's$75,000 for a single filer and$150,000 modified adjusted gross income for a married couple.
00:17:46.180 --> 00:17:49.139
And it phases out up to about$200 for a married couple.
00:17:49.299 --> 00:17:52.659
But, you know, if you go over that, you start losing that standard deduction.
00:17:52.819 --> 00:18:07.460
And again, just like Irma, we're not saying don't do a Roth conversion because of these things, but you have to look through this because some people just went over the threshold and they could have just kept the conversion at 145, you know, kept their income at 145, for example, and stayed just under.
00:18:07.619 --> 00:18:17.940
So these are a couple of things that, you know, probably still will make sense in the long run, but you've got to map through these things and you got to have a team that can sit there and look at all these different thresholds because that feeling isn't fun.
00:18:18.019 --> 00:18:25.779
When you show up to the tax office and you're like, dang, if I had just done$10,000 less of a conversion, I could have an extra$12,000 standard deduction.
00:18:26.099 --> 00:18:31.059
So it's these sort of things that people don't think through when they just do math on you know percentages.
00:18:31.139 --> 00:18:32.819
And this is the kind of things that we can help with.
00:18:32.899 --> 00:18:36.259
And it's really it helps you avoid frustrating conversations.
00:18:36.339 --> 00:18:42.899
Like you said, you don't you don't feel deceived necessarily, but you feel like, dang, I missed out on something that is only around for a little bit.
00:18:42.980 --> 00:18:44.659
And it's uh it's frustrating, right?
00:18:44.740 --> 00:18:47.940
And you just you it's the kind of mistakes that we help you avoid.
00:18:48.180 --> 00:18:48.579
Yeah.
00:18:48.819 --> 00:18:56.339
I mean, that one big beautiful bill, extra standard deduction is around till 2028.
00:18:57.059 --> 00:18:59.059
So we've got a couple more years of that.
00:18:59.220 --> 00:19:14.500
And you know, what better time with that extra standard deduction to be really, really taking a good look at these these Roth conversion strategies and um determining whether it makes sense for you.
00:19:14.819 --> 00:19:19.539
Um, I can tell you though, people just get these things wrong.
00:19:19.779 --> 00:19:21.220
It's easy, it's easy to do.
00:19:21.460 --> 00:19:28.579
They get it wrong, and I'll tell you another place where they get it wrong is they don't consider the standard deduction.
00:19:28.819 --> 00:19:29.220
Right.
00:19:30.099 --> 00:19:50.019
And they think, oh, I just don't have room because they're not even thinking about they're just looking at pure gross income and they're not thinking, oh my gosh, I I forgot I get a thirty thousand dollar, you know, plus standard deduction here, which you know, people just get this stuff wrong.
00:19:50.339 --> 00:20:12.899
And it's you know, I highly encourage you that like if you are, you know, this is something you really because it can like I mean we've seen cases here where a good Roth conversion strategy could save you hundreds of dollars millions of dollars in retirement.
00:20:13.059 --> 00:20:16.180
I mean, it can be a hugely powerful tool.
00:20:16.259 --> 00:20:23.700
And that's even hitting Irma thresholds and you know, not getting all of the big beautiful bill if that's what it means.
00:20:23.859 --> 00:20:39.299
But but you have to you have to model these things out for kind of life expectancy to be able to truly see, okay, so doing the Roth conversion versus not doing the Roth conversion.
00:20:39.379 --> 00:20:42.419
Like if I don't do the Roth conversion, what does that look like?
00:20:42.579 --> 00:20:42.819
Yeah.
00:20:42.980 --> 00:20:46.500
So now my IRA continues just to grow.
00:20:47.059 --> 00:20:55.619
And at some point I'm gonna hit required minimum distribution age, which you know is a little different for everybody.
00:20:55.779 --> 00:21:00.500
I'm 73, Mitch is gonna be 75 or more.
00:21:01.139 --> 00:21:13.460
Um, but you know, once you get to that place, you know, the government's forcing you to take a percentage of that IRA every year and pay the taxes on it.
00:21:14.099 --> 00:21:52.500
And what that can do is, you know, because that IRA has grown so substantially up until that time, that can be enough money alone right there to push you in back, you know, into IRMA if you weren't in it, you know, had hadn't done the Roth conversions, and then you're in IRMA longer on the back end, you know, from required minimum distribution age till the age that you pass, that you end up paying way more, you know, higher Part B premiums than you would have just doing the Roth conversions and take and getting an IRMA hit early on.
00:21:53.139 --> 00:22:01.859
And so this isn't a you know, this is a long big picture decision.
00:22:02.099 --> 00:22:07.859
This is not a you know, short micro, you know, planning decision here.
00:22:08.419 --> 00:22:26.259
And in order to really get your arms around that big picture and to really have it be correct and and taking into consideration Irma, you know, a pretty, you know, a reasonable growth rate on those accounts.
00:22:26.419 --> 00:22:38.899
Um one big beautiful bill thresholds with the extra standard deduction, tax bracket management and understanding, you know, where you're going to hit those thresholds.
00:22:39.220 --> 00:22:47.379
And, you know, standard deduction, taking that in consideration, not to mention inflation and and all of those things.
00:22:47.779 --> 00:23:12.500
You know, we can actually really we have ways to model that where it's as accurate as you could possibly be today and really give you the guidance to optimize and understand, you know, that that's you know that we're we're looking at everything.
00:23:12.579 --> 00:23:16.180
Like we're looking at all the moving parts and we see everything.
00:23:16.419 --> 00:23:30.019
And so if you if you're just doing this in a vacuum, if you're just doing this looking at kind of one little break-even analysis or something, you're gonna mess this up and it's not going to make a lot of sense to you.
00:23:30.099 --> 00:23:39.139
But do just understand the real basic concept of getting paying the taxes on it now puts you in a lower tax bracket later.
00:23:39.859 --> 00:23:42.019
That's the biggest takeaway from all this period.
00:23:42.180 --> 00:23:42.899
That's just it.
00:23:43.220 --> 00:23:50.419
And how powerful that can that be as you get older to be paying less and less and less taxes.
00:23:50.579 --> 00:23:51.859
I mean that's that's huge.
00:23:52.980 --> 00:24:17.940
And so you know getting yourself in that situation and that kind of golden window between the day you retire and the day that you have to take required minimum distributions, if there's a way to go ahead and get all of that pre-tax money converted to Roth money prior to having to take required minimum distributions, then you won, right?
00:24:18.019 --> 00:24:19.220
Like you won the war.
00:24:19.619 --> 00:24:20.099
That's it.
00:24:20.339 --> 00:24:32.659
And you are in great shape going forward potentially in a tax-free environment because if all your income is is Social Security and Roth, you're not paying taxes.
00:24:34.019 --> 00:25:18.899
So give this some thought guys I mean give this some real thought and if you're not sure and you don't feel confident about being able to to really make this choice and make this decision but you know that this could benefit you and you know deep down in your soul that this is probably something you need to be doing, you know, come to ClearpathRetirement.com you know shoot us a message let us know um that you are interested and that you want to talk with our team about it and have us run some scenarios for you, have us model some stuff out for you and really get you clear on this and we can certainly help with that and we'd love to have that conversation.
00:25:19.299 --> 00:25:24.579
We would we would one other quick point I want to add uh you know tax bracket management is harder than ever.
00:25:24.659 --> 00:25:25.700
We talk about it all the time.
00:25:25.859 --> 00:25:34.819
One other place people mess up and I just want to point this out especially right now with interest rates being so high and everyone's getting a lot of fixed income is dividends and interest.
00:25:34.980 --> 00:25:40.500
You know, we always start with the tax return and it's so important to have professionals look at this when you're trying to do these conversions.
00:25:40.740 --> 00:25:48.180
I've seen this so often in the last few years where you know people look at just their pension, their social security and like that's 70,000.
00:25:48.259 --> 00:25:53.539
So I've got another 50 I can, you know, they're and then they put the Roth conversion money in there too.
00:25:53.779 --> 00:26:00.339
But so often people have these you know after tax accounts where you're paying taxes on the dividends and interest that you're receiving.
00:26:00.579 --> 00:26:12.819
And with again with interest rates being so high, sometimes we see people come in from other offices or they're just managing money themselves and they've got a large brokerage account and they're having to pay$30,$40,000 in interest and dividends.
00:26:12.899 --> 00:26:14.099
That goes right on the tax return.
00:26:14.180 --> 00:26:16.740
That's going to count in your income that's just ordinary income.
00:26:16.899 --> 00:26:26.819
So make sure you're factoring that in too it's more important now than it has been the last 10 years because we're at all time high not all time high but you know high uh interest rates for the past 10 years.
00:26:26.980 --> 00:26:28.339
So you keep that in mind.
00:26:28.579 --> 00:26:32.259
Make sure you're looking at the dividends and interest because that's a huge mistake people are making right now.
00:26:32.659 --> 00:26:34.099
Man that's an excellent point.
00:26:34.740 --> 00:26:42.339
Excellent point another place we do see people mess up quite often is they're not taking that those those capital gains into consideration.
00:26:42.579 --> 00:26:56.019
Yeah capital gains any of that stuff so all right well listen I I think you know we've made our point clear here clear here today and um really enjoyed this one.
00:26:56.259 --> 00:27:14.579
Hope you guys enjoyed it please join us each week as we bring you more information like this really good nuggets for you guys to to help you whether you ever you know talk to us or not we want to help you we want to make sure that we're putting things on your radar that actually make a difference.
00:27:15.059 --> 00:27:20.899
So until next week you guys happy trails and happy retirement
