5 Common Roth Conversion Mistakes (+ How to Avoid Making Them) 

@sir reptitious - agree. There are so many different scenarios that I have taken a leap of faith and just doing conversions at around 22 to 24 pct (I hope). I had planned 22 pct but then got an offer to work a little again after I retired so didn't want to pass up an easy short term job with good money. So trying to navigate extra income and my last year before having to worry about IRMAA. All in all, I have decided not to look at conversions as a way to pay less taxes but just a way to get all my 401k converted so that I don't have to pay taxes on it in the future and don't have to worry about RMD's when I am older and maybe not as on top of things when I am older. It will be so much harder to figure out and navigate when getting other income in the future such as pension and social so even if I end up paying more taxes by converting, I think it will just be less complicated than having non converted money that you start using when you need to pay RMD's and taxes could be a lot higher in the future. And IRMAA on top of that.

Totally onboard with your point! We think we won the game and have peace of mind only to find out the most complex aspects of managing our retirement assets are yet to come 😄

Interestingly, the "1000 Monte Carlo simulations" do help you pick the best choice for your future. And you can adjust future tax rates up or down, bracket changes, etc to make the simulation as complex as you want. The only thing you should not do is the suggestion you make, the "middle of the road" choice. Instead, even if you completely avoid simulating future returns, consider the downsides to making a wrong choice in each worse case direction. If your returns are horrible and your nest egg is shrinking constantly, the fear should be about running out of money. Paying high taxes now and future taxes low is a terrible choice. So first and foremost you need to calculate the risk of running out of money with a plan for withdrawal rates under terrible market conditions, especially terrible rates early in retirement. Once you have solved for this dilemma, you now have a baseline bottom for Roth conversions. Most of the video was talking about the top-line for conversions. If you want to make it easy and just pick a middle-of-the-road between these two, I have no complaints. But middle-of-the-road without establishing a baseline bottom is too risky.

For the average person, the strategies are fairly demanding. In actuality, most professionals who have the necessary abilities and knowledge to complete such occupations do so successfully.

Having an investment adviser is the best way to go about the stock market right now, especially for near retirees, I've been in touch with a coach for awhile now mostly and I made over $800K within a short time

Please who is the consultant that assist you with your investment and if you don't mind, how do I get in touch with them?

She is Natalie Lynn Fisk, my consultant. Since then, she has devoted section and leave attention to safeguards that I have been keeping an eye out for. You can locate information about the chief online, on the off chance that you're interested. I made no regrets about substantially adhering to their exchange strategy.

Thank you for this Pointer. It was easy to find your handler, She seems very proficient and flexible. I booked a call session with her.

Doing the same-converting to the top of 24%.

Are you converting all into Roth and paying it's taxes off from your cash/income or withholding some of your Conversion for taxes? The former puts more into Roth.

@@TheHouseofSniffers The target is the target. If you set your target taxable income to a specific number, then simply don't go over it period. All sources of income added together need to be below this. Then use that big pile of money to pay for everything including taxes, Roth conversions, groceries, insurance, and vacations. Everything. Once the money is in your hand, where it came from does not matter at all. If you have too much taxable income, its too much. It does not matter where that taxable income comes from.

Dumb question, the irma bracket is available on the SS site? And how does converting less to cover the tax work, if you still have to pull out the money out of the same taxable account to pay taxes?

@@heynow01Your question is a bit confusing, but I’ll give it a shot. The SSA site will show the IRMAA cost for the current year on your benefit statement, but doesn’t show the brackets. You can Goggle IRMAA Brackets and find them easily. With Roth conversions, the best way to pay the tax is from funds available in a taxable account, which is what I do. Of course, you have to have the funds available. You can pay the tax from the IRA or 401k you’re converting from, but this will cause you to pay additional tax on the money you withdraw to pay the tax.

Agreed. The amount of free information SWM puts out is incredible.

@@swright5690 Sure does. I'm trying to learn every trick in his book!

Nice plan same as ours my pension, IRA & wife taking SS at 62 y/o due to breast cancer we are both 58 y/o. My wife will retire end of this year. Definitely not DYI we will seek out qualified help confusing.

If one only worries about min-maxing the tax game, the more complicated strategies have distinct advantages. But your concern is with the inheritance after your death. Assuming you will have large balances to be inherited both pre-tax and roth, then Roth will win every time since IRA/401k/Roth all have to follow the 10-year withdrawal rule after inheritance, and they will already have to worry about too much taxable getting withdrawn from the IRA/401k.

Thank you Boyd!

@@drmarkm5693 yes, but not the earnings ☺️

@@_-Karl-_ Thank you for the excellent reply. Do you provide fee based consultation service?

LOL But just in case you are not joking, IRMAA is not a person, IRMAA is an increase in the amount you would pay in Medicare premiums due to a higher income. This can be a temporary increase or even an avoidable increase if you plan well.

With enhanced ACA subsidies being extended through 2025, the 8.5% premium cap remains. For folks under 65 this may be the difference quitting work earlier or later. Example: full price for couple in with $100k in retirement income (inc. Roth conversions) for Silver Plan on exchange about $18k, with enhanced subsidies $8.5k.

@@sukjinderpurewal4527 Yes. My point was that a negative aspect of Roth conversions is that they increase your MAGI and reduce your subsidy.

I think it might change when you're old enough to take $ from your IRA without any penalties.

I'm in the same boat. Using Vanguard personal investment service. I too haven't retired yet and my Vanguard guy is encouraging me to do so but without providing any details about taxes other than saying they'll be paid 😄 We need more than that!

@@ivanvarykino8202 Yes, I get the same thing from Vanguard. I asked them if they would help me with tax issues concerning investing and they said No. I guess you get what you pay for.

Roth Conversions do not count towards the Roth Contribution income limit. So this is not a constraint you need to consider.

@@SafeguardWealthManagement Thank you for the response... Are you absolutely sure? I thought the conversions were considered as part of the income. I really hope you are correct and I am wrong.. might be an interesting topic, particularly if I am wrong since I have scaled back my conversions for this specific reason - and others might have as well. BTW, you have an excellent channel, not sure why you don't have more subs. If you could only talk a little slower or pause for a second after defining a complex relationship and give people 2-3 seconds to process it... would help us old people. thanks. My channel is complete opposite of yours if you are curious.

@@Speedospearo - Wow I learned something here. So confusing. On CNN Money, Your Top Roth Questions (I think pasting external links may disappear my comment), I found the below bits of text (the author of piece containing these was Ed Slott CPA, who is the author of newsletter "Ed Slott's IRA Advisor"): "The conversion amount is taxed at your regular income tax rates. It is included in your Adjusted Gross Income (AGI), but the conversion amount is not included as income for Roth IRA eligibility. For example, if your AGI without the conversion income is $90,000 and you convert $60,000, your AGI will be $150,000, but you will still be eligible to convert to the Roth IRA because the $60,000 conversion income does not count towards the $100,000 Roth conversion eligibility limit." "... The correct term [to use for IRA contribution limit] is actually "Modified Adjusted Gross Income" (MAGI), which begins with AGI and makes certain adjustments. The biggest adjustment would be deducting any conversion income from AGI, because the conversion income itself does not count as income in computing MAGI."

Why do you view the Roth contribution to be more valuable than a conversion? I'm not questioning it, just wanted to see if you'd share your reasoning. Or are you not yet 59.5 years old and would have to pay 10% penalty on conversions? I've been doing Roth contributions (and 401-Roth too) but it strains my income and I was thinking I should shift to conversions instead now that I've cleared 59.5 years of age.

@@5metoo Thanks, I subsequently looked that up as well. This ignorance on my part has cost me a considerable amount of lost conversions in the past. I have always that that I must carefully manage my conversions, so I don't loose the contribution ability. I was wrong for years! I would almost certainly have converted more in the past.

There is a video they did about this within the last 18 months.

Mark, what you need to remember is that the IRS has tricky rules about paying taxes. If you do a Roth Conversion in December, they credit you with having done the conversion on the first of the previous January. That’s great and if you have the taxes withheld from the conversion, no problem. But if you think , well I just made the conversion so I will just send in the taxes myself out of other funds, then the IRS will charge penalties for not making quarterly tax payments for each quarter of the year. So basically if you want to use other funds like savings to pay the taxes, you should do the conversion early in the year and make quarterly tax payments.

This gets to the heart of my question, which I'm struggling to figure out right now. Have you ever heard back from anyone or determined an answer?

I just quick went back to that slide deck and added the bad start numbers together and still had a 6% average return. Now the actual CAGR would have been lower but I used average for simplification. I appreciate the compliments, however, on our normal accuracy. Let me know if you still got a lower average than I just quickly got.

@@SafeguardWealthManagement No, you are good. I was thinking of CAGR as the "actual average growth". I never use the simple average, and I quickly popped out an adjustment to get a 6% CAGR. The difference is not nearly as large as I expected, which is always a joy in maths. Please feel free in occasional videos to be 10x more technical in the statistics and maths. Some of your audience enjoys that as much as they enjoy getting ready for retirement. 😄 I am still trying to decide on my risk vs yearly withdrawal vs moving portions out of stocks into fixed income for the first few years. And all of that to retire somewhere between 55-59. (I am 51)

@@_-Karl-_ it has nothing to do with Fed income tax. It is Medicare surcharge for IRMAA base on additional income

@@_-Karl-_ Exactly. It is equivalent +3.5%, not +4.2%. Would like to know how you or him arrive at +4.2%

@@you78750 didnt he say for both people. So is he doing married and adding both increases by the income?

He may be including the additional IRMAA tax on Medicare Part D. Also, it's really 96,000% on the 91,000th dollar, and zero percent on the rest up to $114,000.

and I kept my transfers low enough that I didnt go over the 85k single person limit....

@@_-Karl-_ But anytime after 59.5 years of age you can shift 401k-Roth funds to Roth-IRA so you won't have RMDs. There will be no tax consequences because it is like for like post tax money. I do this quarterly to send my 401k-Roth contributions to my Roth-IRA because the Roth-IRA has better options.

@@_-Karl-_ You've summed it up well. Yes, contribution vs. conversion the question. Thanks so much for your thoughtful comments! And you're right, there is a "should you perform Roth conversions while working" video on this channel. It was helpful. I suspect it's something close to a wash for me. My spouse doesn't work; I have a relatively low income in a high tax state (not likely to move), and my portfolio is much larger than typical for my income level. Not sure when I'll retire, but very likely within 5 years. Due to my lowish income, I need cap gains to supplement income so as to max IRA (14k /incl spouse) and 401k Roth (26k, sent to my Roth-IRA quarterly for 40k total. Though cap gains are more favorable tax wise than regular income, my tax bracket isn't that awful either. My pretax rollover IRA is under a million, and it's my smallest bucket believe it or not. Roth and taxable considerably larger. But it wouldn't be surprising if the rollover IRA exceeds 1m in a few years. I suppose I could even split the difference and contribute to IRA and do incremental rollover instead of just one or the other. I also need some cap gains to reduce a bit of non-mortgage debt and be able to gift some money to family. As someone else said, it seems too complex to really run numbers very effectively. Probably just need to figure out what other things matter most to me.

@@_-Karl-_ The 5k figure was from someone else, but I think your points stand just the same. I don't have a pension, but I get dividends in my taxable account from a long time held high conviction stock that originally didn't give dividends but has for last decade and increases them modestly. That and some other modest passive income means I can't expect taxes to be much lower in the future, if any. No guarantees, but the best case is that the combination is equivalent of a decent pension in the near future. Not banking on it, but can't ignore it's a good possibility for tax purposes since it's significant now. So it wouldn't be tight to come up with money to pay modest Roth conversions, at least I don't think; it is crimping me to max Roth contributions with 40k post tax money, at least now that I want to generate some additional cash from cap gains to spend on family stuff at the same time. I'm trying to do too many things at once. I think I'll take your advice and start nibbling away at modest conversions, and reduce my 401k-Roth contribution to minimum to get company match, thus hanging onto more payroll money. I guess my goal -funny how it takes time to be able to articulate simple things- is to reduce the cap gains burn rate needed to stuff ~40k into a Roth, so I can use more cap gains for other family needs. But I suppose, as you say, the tax effect of this new way may not be that much different. I don't think it could hurt me much so I want to try it. If it helps to nibble away traditional IRA can't hurt. I could still contribute to Roth-IRA in the catch up period after looking at the prior year's tax returns. Thank so much Karl for your thoughtful comments. I've learned important stuff just today. I would pay for this advice. I've learned the hard way these tax issues come down to DIY and chatting with others because tax preparers (even CPAs) don't seem to want to deal with such things (and many are adamant that Roth conversions are always and everywhere bad), and financial planners (I don't generally use them and they annoy me no end) when asked about taxes need to make everything into financial advice and simplistically tell you to hit the minimum tax rates, as if that is your only goal in life. There seems to be no in-between; no real tax advisors out there. Thanks again.

I didn't quite understand his explanation there either. If it was me I'd convert the $90,050 to Roth and pay the taxes out of a separate normal account. Which I would have already done as part of my estimated tax payments.

If I'm wrong, someone please enlighten me.

I believe his assumption in that example is that you're withdrawing the conversion taxes out of the IRA. Otherwise, the example wouldn't make sense.

John this is my plan as well. Since you have to do the RMD anyway , just use it for withholding to cover the taxes on the conversion so you don’t have to take taxes out of the conversion.