Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy. Thanks for a very enlightening video.
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually). I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan. I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad. For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
I'll have to be financially stable in every sense before purchasing my first supercar. The best thing to do with your money is to invest rightly because money left saving will end up with no returns
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions. Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer. Thank you for sharing your story and knowledge on RU-vid.
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
Thank you for the video!. I tried to model in RC the Roth conversion for only a limited number of years as you showed around 11:35, but I don’t see the EDIT button that you show under the scale for filling up a specific bracket with conversions, to limit them to a specific number of years. Is there another way to do it, or how can I make that edit button visible? Thanks in advance.
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
@@rickyaz8640yeah, loads of people don't understand this and just think 100% Roth is better. It's often actually better to have as much pretax as possible since pretax contributions "come off the top" of your income while working but "fill up from the bottom" when retired, including the 0% standard deduction "bracket".
Wow, those potential tax savings from Roth conversions are crazy! I’m even thinking of mixing things up by rolling my Roth into a crypto IRA. Heard My Digital Money lets you do it without penalties. Would love to hear if anyone’s tried that out?
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
What if a person has to pay the taxes on a Roth conversion from an equity account (Vanguard, for example) that is making 8% on average? One loses the money that that amount would make otherwise.
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
If I'm 62 and have about 3 million in combined 401K/403b funds, I feel like withdrawing this money over the next few years to do a Roth conversion would put most of this withdrawal in the highest tax bracket. If that is the case, does that reduce or eliminate the benefit of doing a Roth conversion?
Depends. I’d you don’t get the money out, you could have some painful RMDs in ten years - assuming the account grows. I’d probably do a hybrid approach. Reach out and I can walk through some options.
Thanks Kevin for another great tutorial. However, the version of planner software you are using is not similar to the one we have access to. For example, on the Roth conversion page, we don't have an Edit option (bottom right corner) that you have to customize (like number of years to convert). Is there any work around this?
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake. The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Great video Kevin!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?
Why in the simulator are there only 2 tax brackets? 15% & 25% instead of 10, 12, 22, 24, 32, 35 & 37? It also looks like it jumps to 25% at 150k of household income even tho it should only be 24% for income between 190k and 360k?
My thoughts as well. Federal brackets are graduated, so a bracket does not apply to all income as you indicate - rather multiple rates are applied at various income thresholds. Also the life span of 106 years does not seem realistic either. A bit more detailed analysis is needed than what is presented, I think.
If someone could answer this please. If I do a Roth conversion from my Traditional IRA to a new Roth IRA say in March 2024. Would I pay taxes on the amount converted in 2024 or can it wait until April of 2025 tax season?
If you convert in 2024, then that money is considered as income and taxed for calendar 2024. The tax can be withheld by the broker of your IRA at the time of conversion (thus reducing the total value of the new Roth IRA), or you can pay the tax yourself from other funds you have via quarterly estimated payments to the IRS. If you wait to pay the 2024 tax bill until you file taxes in 2025, the IRS may penalize you because of the excessive tax balance that is due. I'm not a tax expert so you may need to seek advise from one for real advice. And don't forget state income taxes that also may be generated as a result of the conversion, if applicable for your state.
@@wd3574 thank you for your response. That sounds exactly what I just found out from our new CPA. It’s funny how my whole working life was make money and save save save. Now it’s dealing with taxes to keep as much of it as I can. Hey. Thanks again and have a great day.
Is it too late for us?! We came to retirement planning late in the game. I'm 66, my husband is 68. We're both still working making more than ever, but we figured we couldn't retire before 70 because we only have like $750k in 401ks. Would converting to Roth's still make sense for us?
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue: I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit. I'm unable to find a path where Roth IRA conversions make sense. If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Do you have experience working with FERS and TSP? I am 59 and have beginning to look at options. I would like to find someone who has experience with VA. I also have a sizable TIAA account from a university retirement account that is active so I need to time retirement from both jobs (dual faculty appointment), so a little complicated.
Mr. Lum, I understand that it is best to use funds outside of my TIRA to pay tax on a Roth conversion. But if I don't have the outside funds, is using funds from within my TIRA alright? Would this option still be better than not doing a Roth conversion at all?
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
How Roth IRA conversion works if I already max out the 2024 contribution? Can I convert for example 20K from 401K straight to Roth IRA, or I have to convert from 401K to IRA and then to Roth IRA like the back door? Thanks
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
Excellent video. I'm just curious, wouldn't you be better off with smaller ROTH conversions on the front end and paying less taxes then and paying some small tax amounts later in life? What you would call tax efficient not tax free. What are your thoughts.
I jus turned 50 and been saving in my 401 since 2001, I have 1 m so far and assuming I work another 10 years- I want to learn ehat to do with this money to allow to live off appreciation or interest ?
Great video, thanks, What if your Roth IRA contribution room is already used up. Can you still roll over amounts from 401k? Or would that be considered over contribution and lead to penalties?
Yes, but at the Capitol Gains tax levels (long or short term, depending on how long you had the investment), not the Income Tax levels. These CG tax rates are much lower than income tax rates, google them for your particular situation.
I'm not sure how I understand how this couple has about 800k to convert but can convert so little every year to stay in the 12 pct bracket. Maybe it's because they are in the married tax bracket. I am single and have half as much to convert but starting in my early 60's, I have to convert about 50 to 70k a year to be able to convert it all before ss starts and this already puts me in the 22 pct bracket. I started converting 2 years ago and have been in the 22 pct both years. But I'm not looking at just whether I will be saving in taxes but I was thinking we have to pay taxes on our deferred accounts anyway, so why not just convert it to a Roth? It doesn't make sense not to. I think it's also important to get it converted to keep from triggering IRMAA thresholds. I also don't want to have to worry about RMD's when older and not as on top of things. I don't guess this couple has a pension? Because of my pension, even if small, I don't think I can get out of paying taxes on ss. I think single people are at a disadvantage too as married filers get to have double the income for taxes as well as Irmaa.
Focusing on tax savings is the wrong way to look at it. The only thing that matters is the tax rate you are paying now to convert vs the tax rate in the future. An important point is that with a conversion you are paying all the tax up front at the top of your income tax bracket and that is money that is no longer available for you to invest. With a traditional IRA, you can defer to age 75 before having to withdraw and the taxes will be paid slowly over many years and will be paid with future dollars which are worth less due to inflation. If at age 75+ you only have SS in addition to the IRA withdrawals and take advantage of the standard deduction, you will be pulling out money in a mix of low and high tax brackets. Here is a simple example. You are in the 22% tax bracket and convert $100k per year for 5 years at ages 60 to 65. Total tax on $500k is $110k. Let’s assume that doubles to $1m by the time you are 75, which is all tax free. Instead if you do not convert, your $500k still doubles to $1m at 75 when you need to start RMDs. It is taxable but if you take the $110k you would have paid to convert that also doubles to $220k. In year one, RMDs are about $40k of the $1m. If you have SS of $40k plus the $40k RMD your total taxable income will be about $30k after standard deduction which will mostly be in the 10% bracket with a little in the 12% or about $3500. The income on the $220k at a conservative 4.5% is $10k, more than enough to pay the tax and not touch the principal. Yes RMDs increase and eventually you will pay more in taxes, but you have had more money working for you for many years to offset it. I know this is an extreme example as it is unlikely you will only have SS plus the RMD as income, but the points made above still hold true as long as the “average” tax rate paid later is equal to or lower than the conversion tax rate paid. So if you are in the 22% bracket today you pay all conversion taxes at that rate. If you are in the 25% bracket later, you pay a blend of rates, which depending on your circumstances could be some at zero, 10%,12% etc with only a small portion at the highest rate. And it’s spread out over many years as well.
I didn't read all of this but got the gist of it and agree. In short, it seems the assumption of the video is that you quit working and delay taking social security. That won't be the case with me and the Mrs. and at this point in our lives, we're at the highest income levels that we'll see for the last 2 years of our working lives. We also only have one non-employer sponsored tax-deferred account (previous employer) so that would be the only one available. I don't see us doing the conversions.
Very thoughtful comment. People make a similar mistake in deciding whether to start distributions at 62 or FRA (assuming they are not earning through a job and getting SS witheld). They treat money taken through age 62-67 as having same value as money taken at 78, completely ignoring time value of money. Another thing is the ROI on your earlier distributions are also ignored while trying to determine the age at which both strategies breakeven.
Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
Great information. Is it possible to offset my per year conversion amount to still have 0 income by harvesting my stock investment lost. I.e. if i take a $100k lost, can i do a $100k conversion for the same year?
We live in the richest country in the world. Now tell me why what's left of the middle class has to be concerned about being taxed to death. This country sux ass compared to the bill of goods we were sold...
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
Thanks for the video. One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
I'm gonna convert all mine to a roth right before i die ! because i will not need it at that point! LOL then put in my will that no moneys will be distributed for a 5 years. by then it will have time to grow.
I'm looking to retire next 5 years..at age 62.. I would like to withdraw part of my 401k then invest that money overseas instead converting to Roth Ira. What are my penalties or tax dues? ..Thanks for any info
I'm 47 now.. and I don't want to wait until I'm 59 1/2 to begin converting my 401k.. I'm "retiring" early... What are my options? Roth Conversion Ladder appears to be an oft-recommended option...
Per the recommendation of a financial advisor, we put 401k contributions into a Vanguard Roth and traditional 401k account each pay period. You might want to ask your HR Department if Roth 401k contributions is an option for you.
Where to find the free tools to calculate my future tax bracket? Anyway I’m 62 and started to do the conversion last year ,40k from my 401 to Roth IRA without paying taxes because I’m still in my tax bracket after conversion and wife(retired) pays 11%taxes in all of his incomes( Rmd,SSS and pension) and I will continue the conversion till 65
