Full Transcript for Considering a Roth Conversion? 5 Things to Think Through First

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