Be flexible on your plan as you could be in a downward trending market when you planned to begin conversions so you might consider modeling using some of your deferred withdrawals to pay for a portion of your living expenses extending your cash over a longer period to allow the market to recover. To often we get overly focused on avoiding taxes when we are best served to optimize vs maximize investment growth and taxes while in retirement. I, like many, was originally planning to live off cash while converting, but discovered through modeling several scenarios (various inflation and return rates) that I can actually generate more investment growth while accepting more taxes (both income & IRMAA). Having multiple plans is important as you do not know what economic cycle you will be in until you are in it. Your retirement plan is an active plan that needs to be able to change as conditions dictate. Please do not think it is like long-term investing where you can set-it-and-forget-it. You are positioned well with having multiple years of living expenses. Make sure your investment portfolio has your desired asset allocations and take advantage of a Health Saving Account which can be used to pay for Medicare (B, D, and Advantage) premiums as well as long-term care insurance premiums.
Similar, but I'm thinking of Roth conversions through 2025, then one year of capital gains harvesting to clear out the high dividend investments I have been trapped in.
We are doing this very thing right now, maxing out the 24% bracket until age 63, then dialing our conversions back to the top of the first Medicare income bracket to avoid age 65 IRMAA surcharges.
One thing that isn't mentioned nearly often enough is that at least half of us will wind up single at some point in our retirement due to the simple fact that at some point our spouse will die. When that happens you're in for a VERY nasty tax surprise - you are now paying taxes as single. Brackets are cut in half, and the various penalty thresholds are also cut in half. Social Security alone can push you into the 22% tax bracket.
Exactly, that damn Widow's Tax! That, & the point that if longevity does not run in your family, paying taxes now yields tax-free money to any heirs. As Ed Slott says, you're sort of buying taxation insurance. You lock-in your tax rate at current rates, instead of "hoping" future rates stay as low as they are today, which is not a wise bet, especially if one has any ballooning pre-tax accounts. But I do get the point made in the video, and this does require much consideration.
that issue plus minimizing rmds is my motivation for roth conversions. i don't have to convert everything that i can ( my 457b for example can't be ). i don't mind filling out the 1st 2 brackets with tax paying tax deferreds otherwise.
@@Random-ld6wgBy the way, RMDs are an overblown problem. You start at 4% withdrawals (which is what you need for the 4% rule anyway) and you don't even hit 8% before you reach the average life expectancy. Hardly a crisis considering the median retiree only has $148,000 in retirement accounts. 8% of that doesn't even get you out of the standard deduction If RMDs would be trouble for someone then they have enough money that they should have hired a financial advisor a long time ago. The financial advisor would have already taken RMDs into account for planning purposes
Another thing to consider is legacy. My goal is to have the right amount of traditional funds to fill up the 12% bracket and then at 73 have the balance low enough that RMD's don't push me up a bracket. I have about 2/3's of my investments in ROTH, I'll use some of it to pad my income and the rest will be a tax free inheritance for my daughters.
I'm 63, and in 3 years I'll have 2/3 in Roth, as well. And, like you, my plan is to fill up the 12/15% tax bracket with my tax deferred investments. I have no children, so my goal is to deplete my investments by age 95. If I live past 95, I'll do a reverse mortgage to get my hands on some more cash. I started my Roth conversions in 2015. It's been a lot of calculations, but it is fun to see the tax savings. Brilliant minds think alike!
@@johngill2853 right now everyone is enjoying lower taxes because of the trump cuts set to expire in a couple years. Not a trump fan but just saying it might benefit someone to pay taxes now as they are historically low and we have a lot of stuff in the future we promised to pay for and have no way to fund
The biggest bonus for me is tax planning. Having to take out larger amounts for a Roth rollover can cause your SS to be taxed as well as IRMAA and its 2 year lookback. Another unexpected bonus of paying my taxes earlier and having a large Roth, I'll have lower income and will qualify for ACA subsidy.
@@charlielipthratt7291 yes in your situation it may be prudent But that is not general advice for everyone. Your in the top 5% or maybe 10% in wealth. Only 7% of people pay IRMAA. For the masses that probably isn't a good plan
It's optimal to have both a traditional and a Roth account. It's also suboptimal to contribute to both a Roth and a traditional in the same year. By definition, both of them won't be tax effective in the same year
heck yeah. I retired last yr under Rule 55, all my money is in Roth and taxable accounts. Once i reach 65, I appear to be "broke on paper" in regards to IRMAA and will be in the lowest bracket for medicare.
Great video! Spot on! One more reason not to convert 100% to a tax-free account is if one is inclined to donate money to charities. Qualified Charitable Donations (QCDs) are a great way to do this if you are over 70 1/2. You are able to move that money directly from your tax deferred bucket to the charity and not pay taxes or RMDs on that money. Paying taxes on the money via conversions, getting to 100% tax-free and then donating the tax-free money to the charity does not make good financial sense. You point that out very well in your other videos. Keep it up!
For example, my estimated avoided tax rate on my future Roth withdrawals is 45.45%. The subcategories are: 28.7%: federal tax avoided; assumes 15% & 25% tax rates return on 1/1/26 3.9%: IRMAA (higher Medicare premium) tax avoided 9.7%: California income tax avoided 1.4%: NIIT (Net Investment Income Tax) avoided 1.75%: 15% long term capital gains tax avoided 28.7% + 3.9% + 9.7% + 1.4% + 1.75% = 45.45%. My average Roth conversion tax rate was 13%. Thus, my average tax rate savings is 32.45% (45.45% - 13%).
Best time to do Roth conversions is in a down market or with investments that are at a low point with a compelling belief they are under-valued and will rebound. Convert more at much lower cost in terms of taxes and get all future capital gains tax-free. Also hedging against future increases in capital gans tax rates. Plus wage tax cuts from TCJA end December 2025. After expiration the rates increase by 3-4% for each income group. That may not sound like much but it is $3,000 per $100K in income. Better to convert now as long as it doesnt drive you up into next tax bracket.
Your tax software is showing the top IRMAA bracket incorrectly. It will adjust for inflation just like the rest of the brackets starting in 2028. See 20 CFR 418.1115 (e) (2).
As a single individual with a 401k about 450k, why couldn't I just convert 11,600 of that per year into a Roth, does guaranteeing that I would never pay more than 10%
When you convert 401K, 403B type plans to Roth IRA, I think you lose ERISA protection from judgements and bankruptcy; however if you convert to Roth 401k or 403B I believe you retain the protection, because its within the same plan, check your plan advisors and CPAs to be sure. Laws should be changed to extend the ERISA protection for any type of retirement money converted to a Roth IRA, even for pension lumpsum money that is converted to Roth.
I plan to move to California in a couple years, and Roth IRAs have limited protection there. Thus, I plan to take out an umbrella policy to provide myself some protection, as my Roth balance is $1,300,000.
Also consider wisely spreading out the tax burden even beyond your own lifespan. My wife and I each have sizable IRA's. We each have named the beneficiaries such that roughly 1/3 goes to each of the two adult children and to the surviving spouse. Suppose one of us survives the other by 10 years. The sons get to spread out distributions from the first inherited IRA over 10-11 years, potentially remaining in the lower tax brackets, and eventually gets to spread out the remaining IRA inheritance over a separate 10-11 year span. The surviving spouse has more than enough retirement assets and the sons get the benefit earlier than waiting for both parents to pass, while they're younger and have greater use for the financial boost, and have a lower tax burden. Most couples name the spouse as the only primary beneficiary and children named secondary beneficiaries. The kids get the money later in life and. if a sizeable IRA, they will almost certainly be pushed into the next tax bracket during the 10-11 year distribution window.
Great video! I am one of those people aiming at a tax-free retirement and living off of SS and Roth income. What you say makes sense! However, if I do as you suggest and utilize the lowest brackets across my lifetime, will my higher income in later years cause my social security to be taxable? Tax free social security is a nice perk! But does it come at the expense of what you're suggesting here (higher after tax wealth)? Is it possible to have both?
How to figure how much to leave in pre-tax? Is it a percentage of investable assets? Is it a fixed amount, per person or per household? Is the QCD indexed to inflation? What about the one-time Secure 2.0 $50,000 trust/annuity option? Might be good to limit pre-tax to above those limits, but not too far above. If it comes down to predicting the future of tax rates, it probably means keep some percentage of assets pre-tax, up to some limited dollar amount. In other words, maybe keep 1/4 of assets up to $500,000 as pre-tax, so if you have $320,000 in assets you'd keep $80,000 in pre-tax. But if you had $32,000,000 in assets you'd only keep $500,000 pre-tax. But maybe the less assets you have, the higher percentage could be in pre-tax because you won't be spending that much. It's a mess... not only because predicting the future is hard even if it were to mostly continue the same, but changing tax rates, changing tax laws all will affect your answer and those are impossible to predict. Making to so that when you factor in simplicity... It might be better to over convert to the amount of taxes that you are willing to pay for simplicity and consider it money well spent.
It's complicated. The starting place is probably finding your anticipated future Social Security annual benefit amount, and understanding how it will be taxed when combined with different levels of additional taxable income. Then you have some idea of whether your future marginal rate will be higher than your current marginal rate while making Roth conversions.
@@captsorghum no, trying to compute future tax rates is a waste of time. You can't do it. It has been 33 years since my first IRA contribution. Tax rates change every few years. Social security brackets haven't changed but once when they added the 85% taxable without changing the 50% taxable. In two years tax rates are targeted to go up automatically. Will they act to keep them low? Will they rework brackets again? Anything you forecast for taxes is a pointless guess. Looking back, I likely should have been in Roth, or converted much more aggressively before now. But I cannot be certain... I am going to convert 1/3 this year, probably another 1/3 next year (half, actually). After that I'll make more plans...
False. Those groups pay more taxes than any group by far. The jobs created by their enterprises are responsible for millions of high W-2 wage, high tax bracket jobs. Not to mention real estate taxes, property taxes and sales taxes.
With an HI of only $60k my wife and I will manage to max out our Roth accounts this year and still have some extra money for retirement savings. At age 33, we are a long way from retirement age so my question is what is the next best place to put that money for tax efficiency? I belive my wife does qualify for an HSA so considering that as an option.
Alwaya Roth when you can. The money is taking out regardless. Its all about do you wanna pay now or later? Pay now, and your gains are not eaten in the future. Pay later and your on YT for days, or hiring a specialist to figure out your conversions. So you wont screw up your SS, medicare, and over pay on taxes.
@@jimfarmer7811 True but thats on the contribution in a Roth vs Traditional its the gains. Then people are trying to figure out how to chunk a IRA worth over 1M without losing 500k or so.
@@mikewill1740 I did the calculations several years back. If you save $2,000 per year from taxes on a traditional IRA and put it in an HSA stock market investment you would have $500,000 at the end of 40 years. That would pay for a lot of taxes.
Roth baby!!! Regardless, your charts weren’t super clear. Your first example is giving them $80,000 in total ($60,000 SS plus $20,000 IRA) tax free annual income. The second example is bringing in $105,000 ($60,000 SS and $45,000 in long term capitol gains) annually, tax free. The standard deduction is a wonderful gift to use. I’m doing a lump sum Roth conversion 11 years before retirement. It will cost way less in taxes now, than paying them long term, even at a 10% tax bracket, because of how much it will have grown. My heirs will also get a tax free gift in the future. It boils down to individual circumstances, but most should be able to do a tax free future, if they plan it correctly.
In this example the couple pay income tax on 85% of their social security. The provisional income calculation includes the $45k in capital gains (even though it is taxed at 0%), this pushes them over the line of taxing social security. Granted it won't be a big tax bill when they subtract the standard deduction, since they only have around $20K of taxable income.
@@jerrylabat550 I don’t have the exact numbers in front of me, but at this income you are taxed at “up to” 85% of your Social Security. The calculation is quite complicated, but depending on other income a portion of SS may stay at 0%, 50%, and finally 85%. This year we had some of our Social Security “subject” to taxation, but payed no tax due to the Standard deduction. Same last year. The fact is that it takes quite a bit of income to make “all” your SS “subject” to taxation, and in the end the “effective” tax rate is still quite low. We don’t anticipate ever getting into 20% tax rates in retirement, despite having $100k of income. Effective tax rates should run 12-15% at that income level.
@@randolphh8005 , First off, I went by his words and charts. I didn’t do the math. I figured he had. Now that I have, he is basically right on. They’ll pay $5 in taxes.
@@Detectken I was referring to your strategy, not the video. Not having any pretax money, is a disadvantage as long as there is a progressive tax system(especially with a 0% bracket)
Safeguard Wealth: Calls Roth "tax free" Also Safeguard Wealth: Proves that gains in a Roth aren't tax free because it doesn't matter whether you tax the investment before or after the gains. As long as the tax rate is the same, the gains are taxed by the opportunity cost of having less initial investment The Roth isn't "tax free" it's "taxes paid". Just a small pet peeve of mine- I definitely believe Roth has a place in most retirement plans.
Good point, especially if some politician decides to try and tax Roth withdrawals. Having said that, I calculated my Alternative Minimum Tax (AMT), to see if I'd ever get hit with it. I do (for ten tax years in the future). The reason is because I converted 66% of my portfolio to Roth. And to be specific, I'll have a high mortgage tax deduction and large amounts of 0% tax rate capital gains and dividends (from cash out refinance monies). I'll be at the top of the 12/15% tax bracket, thus I'll qualify for the 0% tax rate on capital gains/dividends. So, I sort of feel like I'm being penalized (taxed again during these ten tax years) for having converted a lot to my Roth. My AMT is not huge, but a little annoying. If my medical expenses and charitable are higher than what I have planned, in these ten years, I can avoid AMT. So, I have that as a option, for avoiding AMT. Bottom line: if anybody has a tax plan like myself, they may get hit with AMT in the future. Most of us never even calculate AMT (but it is still there). I'm sure the IRS auto calculates it for us annually, to see who owes it. I got hit with IRMAA a few years back. I was unaware of this 'tax'. I got hit for two years, as the higher medicare premium is applied two years after the tax year.
Your analysis does not take into account the effect of paying tax on 85% of social security for many years. Social security tax makes the rates no longer gradually progressive. It makes a significant difference if you can avoid all tax on social security in the latter years of retirement (after age 70, assuming maxing out ss). You can avoid having your social security taxed if you convert to 100% roth in the early years of retirement.
Even with Soc Sec you don’t want 100% Roth. People ignore the fact that if you are 100% Roth your portfolio is smaller and you paid a lot of taxes for the privilege. For those with very large portfolios, a large % of Roth makes more sense.. Also when calculating distributions, it is the effective tax rate that matters, not the marginal. The opposite is true of contributions.
@@randolphh8005 At the same effective rate it does not matter if your portfolio is smaller. My effective tax rate if I pass at my expected mortality will be lower (
@@kcnicely it is important to understand that Social Security is only “subject” to taxation if you have larger amounts of other income. Even if it is “subject” to taxation, the portion “subject” is often way less than 85%. And, just because it is subject to taxation does not mean you will pay tax. We have had a portion of our SS “subject” the last 2 years, but have not PAID any tax on it, due to the standard deduction, and the way the taxation is calculated. In fact we have barely filled our standard deduction let alone the 10% bracket. Having NO pretax money, means you are paying excess taxes on your Roth conversions, and in the end more taxes to have a smaller portfolio. I agree that with larger portfolios, a larger % of Roth can make sense, but 100% Roth never makes sense from a taxation standpoint.
@@randolphh8005 In my case it will take a little over $7000 in other income before taxes kick in at age 70. Social security itself makes up most of my provisional income. That is not taking into account the cola increases and the fact that the 50 and 80 percent thresholds are not indexed to inflation.
@@randolphh8005 In my case it only takes about $12,000 added to my social security income to overcome the standard deduction using today's dollars, today's tax rates, today's standard deduction and the total social security I would receive in today's dollars. If I were to project that into the future to when I turn 70, it would only get to be less because the 50% and 80% thresholds don't get indexed for inflation. At that point I will begin being taxed at a rate of 18.5%. So yes, I could have some amount of traditional IRA without having social security taxation kick in, but it would not take much.
Why the wealthy have 100% tax it free income, corporations have huge loopholes and tax breaks that you're retired person doesn't have so I find it ironic and sad that you're trying to say that people who've worked their whole life should have the retirement taxed. Why aren't you home about the billionaires in Mexico corporations and real estate that isn't taxed It's funny you don't mention that
I do not object to taxes. I understand the need. However, recently the US paid for the bridge that was destroyed by a ship. The owner of the ship should have paid that bill. If that causes a bankruptcy, so be it. They were not doing a good job anyway.
Public debt/GDP ratio in the US is closing in on 130% (higher than the WWII peak). Tax rates (for all brackets) are going higher in the future. My retirement will happen in that future. I choose to pay the tax now and Roth convert while I have the cash flow to afford it. If I'm wrong and this is the biggest planning mistake I make, well, I can live with it. Thank you for such an informative video!
totally agree! I view the Roth as a risk management tool since we don't know what future tax rates will be, but one look at the national debt and it seems inescapable that they will have to be higher than what they are today. A Roth in my pocket means I don't have to worry about it.
@@jessefletcher9116 Eric's advice is sound in a fiscally stable world and you shouldn't over-emphasize the tails of the distribution. But we are now through the looking glass and the political elites seem to care not a wit. Debt/GDP was 70% in 2007 and just 30% in the 1970s. The 1970s was the last period of "fiscal dominance" and we ran into big problems getting central banks and others to buy our government debt. Since 1800, 51 out of 52 countries that hit 130% would go on to default.
I like your thinking. I made the opposite decision for a similar reason. I am not converting and will enjoy life today. If I am lucky enough to be alive at 75 when RMDs start and lucky enough to have growth in my investments I will be happy to pay the tax.
Lot of layers to the tax onion, pretax money in the beginning will have a larger balance to compound through time but I get your logic as well, we are living a w0ke version of Atlas Shrugged
I am in the same tax bracket whether i do everything roth or pre-tax. Same percentage. And even if i managed to somehow drop to a lower tax bracket, it is only a few percent. But with roth, i will avoid minimum required distribution and having to plan rollovers in the future. However, with pre-tax i could potentially pay less tax on just that saved money in the future. Food for thought.
Any future financial planning often includes educated guesses, as some things are out of our control. I'm planning on taxes going up on 1/1/26, but I can't be positive until we get to 1/1/26.
Ok but you’re forgetting that leaving Tax-Deferred money to your heirs will require them to come up with the money to pay the taxes on distributions. Nobody wants that.
Actually, you DO want to leave your heirs tax deferred money, if the cost to convert to a Roth is at a higher tax rate than the estimated tax rate you or your heirs would avoid, on said, future Roth withdrawals. This is a basic concept (math) of Roth conversions, that needs to be understood. We don't know what future tax rates will be, thus we have to make an educated guess. Any future financial planning often includes educated guesses, as some things are out of our control. If you do an example where you convert to a Roth at 15%, and your, (or heirs') estimated tax rate avoided on future Roth withdrawals is 15%, you'll see there was NO gain or loss.
@@_-Karl-_ Good point. This also highlights the importance of converting at a LOW tax rate. One thing I did was to pull as much cash out of my home, via a cash-out refinanced mortgage. So far, I've been unable to convince anyone else of this option that most of us have. I see a lot of people converting at high tax rates, which hinders the benefit of Roth conversions.
They won't really have to come up with the money to pay taxes on distributions. If they take $100,000 out of their inherited IRAs, they will simply have to withhold taxes from the distribution. The broader point, of considering the tax rate of your heirs is 100% correct. The right answer will depend on all of the variables of one's situation. In most cases, however, having all assets in Roth accounts will still rarely make sense. Keep in mind that if you are just filling up the low brackets with IRA distributions (standard deduction, 10%, etc.) then the traditional IRA balance will still be small, so at most you are passing on a small inherited IRA.
I disagree 🎉 It’s not just comparing tax rates. Tax rates affect what I pull off as income. But converting almost everything to Roth makes it so simple to manage that I don’t have to hire a financial advisor that charges 1% on what I have invested. 1% of my million is $10,000 annually. That’s much more than what is saved with somewhat lower taxes on income. My elderly brain will love the simplicity of all Roth.😊
1. Not all advisors charge 1%. Some advisors charge hourly or even flat fee if you'd prefer that structure 2. Making suboptimal decisions simply shifts costs to a different area. In the example I gave, the cost would have been just under $700,000 by the end of the plan. This is just one slice of a financial plan. Simplicity in this case, has a significant cost.
I love your videos and called to see about becoming a client. My comment is why do you often/always show examples of people with less than $2M in assets when you wouldn't take on a client with less than $2M?
1. We may in the future and are trying to increase our capacities. 2. This channel isn't just for retirees with $2M. If we can't help everyone on a one-to-one basis, we'd still like to help through education.
Planning retirement since age 35, now 61. Roth came into existence in 1998. Back then you could only put 2,000 in till about 2004 when they started raising the limits. Wife and I maxed out these accounts from day 1. Then will we both started maxing out Roth 401k in 2009 when that became an option. Retired in 2022, have 70% in Roth today and 30% pretax. Only made one conversion during our accumulation and made an average of 120,000 to 150,000 in wages over the years. The plan now is to spend most or all pretax till 70 and then take SS. If any pretax left it will go towards charitable giving. Then only SS and Roth accounts, the taxes will behind us and our children’s inheritance 10 years out.
A reminder for those targeting the 12% bracket which will likely be the 15% bracket in 2026. If you are collecting social security in that year, you are effectively paying a higher tax rate as you may be causing non-taxable social security to become up to 85% taxable. In other words, converting to Roth at 22-24% rates before collecting social security is roughly the same as 185% of 12-15% while collecting social security later in life.
How does the value of the dollar affect these calculations? For example, if one pays tax now at 15% with current value dollars or pays the 15% 20 years later with dollars worth .75 of current value, would they actually be paying less?
I did math and it is same. However, marginal tax rates will increase 3-4% in 2026 due to expiration of Tax Cuts and Jobs Act (TCJA). Do you think this will be renewed? I doubt it. Better get your 3-4% gain now while you can because who thinks taxes will decrease in the future.
One element that I did not see factored into this video is the federal standard deduction. A downside of a 100% tax-free retirement is that you don't get to take advantage of the annual standard deduction.
It was included, just not pointed out. For instance, the reason there is a 0% zone in the first tax graphs I showed was because of the standard deduction. But yes, you are 100% correct. Having all your money in Roth prevents you from utilizing this 0% zone each year
Sounds nice in principle but, if you have currently a lot in cash or bonds giving interest at today’s rates and/or a lot in dividend paying stocks, the interest and NQ dividends will be filling most or all of your standard deduction not living you much space to convert to Roth at 0%.
YOU COMPLETELY IGNORE THE MANY YEARS OF GROWTH THAIS TAX FREE - - THATS THE REAL BENEFIT TO PAING THE THAWHILE WORKING - EVEN IF HIGH AND CONTRUBUTE TO ROTH NOT PRETAX
We didn't ignore this at all. Whether the growth is tax-free or tax-deferred, the best options comes down to the tax rate paid on contribution vs. withdrawal as shown in the table comparing Traditional IRA vs. Roth Conversion
@@SafeguardWealthManagement would be interesting to see this comparison when taking into account asset location, when you convert to Roth in the beginning and have that Roth invested in stocks, Vs not converting but keeping the pre-tax account mostly in bonds. Of course, the latter is not always realistic as you should always have a healthy amount in stocks (maybe in a taxable account) to keep up with inflation.
Agree that you shouldn't be hell bent on doing roth conversions but you should lean towards them because: 1. Behaviorally you want to get the tax pain over with. 2. It's easier to pay an equal amount when you're making income than not. 3. If you want to use the money before 59.
