STOP! Why You Shouldn't Do a Roth Conversion
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This is another episode of ready for retirement and your host, James, can all and I hear to teach you to get the moser life with your money now aren't be epsom.

So James.

how are you doing?

I'm doing well. Have you ever been happy .

to get a surgery? No.

I don't think most people are happy. But I have a weird situation where I was really happy about the thought of getting surgery because I thought I would fix all of my problems. I went to physical therapy.

I gone. mr. Said this diagnosis, I went to so many doctors, no one told me what to do.

So one point else, like, look, just opened me up and just fixed me. I'm in that much agony because of my hope. I play socket too much and I love IT.

That's another epo de. But i'll see people come to me and i'm sure you've seen IT as well where they go. James, just tell me what rock conversion do I do? Is IT the twenty two percent bracket? It's gonna come twenty five.

So I don't know what bracket do I do. They're conversion happy, and they just wanted do a conversion because they think it's gna fix all of their problems in the same way. I thought surgery would fix all of my problems. But before you do surgery, there are things we should look at. And so I want to talk to you today about when IT does and does not make sense to do these rough conversions.

I like that analogy because IT is like surgery, because people don't realize this is rough conversions are painful up front. In the same way, surgery can be painful up front. And I mean that because what you're doing, the rough conversions, is you're think i'm going to pay more taxes today so that I don't have to pay as much in the future.

I'm going to pay taxes today at a lower rates. They don't have to pay them in the future at a higher rate. Can like surgery. I'm going to go to the pain today so I can continue playing soccer and have this quality of life. The teacher, but perfect analogy.

Where should we start with this? Because to your point, people to say, open me up, do surgery, do the conversions? Not always the right approach.

Let's start with the two people that deserve to get credit. And as I bring this up on my screen, um can you share with everyone who not seen last few epo des, who the heck we are? We're doing this together. We have separate shows in all. Pola.

yes, i'm James. This is r we h we work together with a lot of people did not know A R E has a podcast channel and the youtube channel. I podcast channel and the youtube channel.

You're watch if you're on youtube or watching on my channel. If you're listening, you might be listening always early retirement podcast, might be listened to my ready for retire podcast because we're going na take the audio content and pushed about those places. But we said he'd been doing this for several years together now separate channels, people are surprised.

Sometimes they say, oh, you're actually working together. We say, yes. So let's actually do a podcast episode. Well, we get to banter back and forth about different things, not just about things that we want to try about, but about comments were getting on our youtube videos, a feedback we're getting from people listening, so we can answer a lot of the questions that many of you have.

awesome. I'm gonna steal one line that I believe with your dad told you. You said, your job of as an adviser is not just to advise, but teach people how to think, how to organize their brain.

And so my hope is for some of you, as you take away from the subset today, wow, I should never do a rough conversion. And any time I see someone bringing up online or a neighbor or coworker use this fancy conversion word, all git to go, I don't have to worry about IT. And others of you are going be like, well, this is going to really change how much I can spend in retirement, legacy goals.

And a so here are the two people who get credit for today's episode. Once again, if you have a comment that you want to leave, you want a question for us to address, please drop IT in the comments, and we will look to answer that in a few represent. So this comes from Linda hip kins, four, five, nine, two.

When is the best time to perform roth conversions for a couple who is sixty four and sixty with a pretax retirement value of two and a half million? Also, how much per year will James? This is an easy exam answer um always feber tenth like how this first and not know it's always no it's not february time to show guys that is the first question. The second question for this is coming from thunder snow and I just pick this because that's a cool user name thunder now you like that user name. I'm following thunder now.

whatever they doing, and that's great unders .

know that the new name of our shell, do you have to be working to do a rough conversion or can be done after retirement? I can see how the biggest hesitate doing a conversion is that you're guarantee that you'll pay taxes es up front and you don't know what brackets will be in the future.

What do you think these questions a good questions. And I think that these questions with rough commercials in general, there's a thought that OK, there's a is a pretty quick answer to this. Whether the reality is IT depends on so many things at the question is why why are we doing rough conversions, which a lot of people may sound ridiculous.

There's only one reason why. But IT, it's not some people to rough conversions for themselves of how can I keep my lifetime tax back as as possible. Some people do tax brackets for potential arriving spellers of.

They know, hey, my health is not bad. I've got a Younger spouse and the tics, my health fine, but my I Younger spells, if I pass away, they are going to single tax bracket as opposed to married final render. They're going to require dirigo tions going to push some way up to the top about. I need to avoid that others do for their kids of we actually don't need these assets, but we don't want our kids to have to inherit them and then be forced to distribute all their pretext account baLances at a time that probably corresponds with our own peak earning years. We want this to be part of our state plan or our our transition plan even to so understanding why you're doing IT is key because then you can look at I I guess I should say IT this way.

My first thing I is when someone says how much I do a last margin before answering, I first want to start with, why should you not do a rough? I I want to see, is there any way we can prevent you from pain tax up front, from eating your colour flower of front, like you talk about? And if there is, great, but sometimes we do the analysis, we do everything we say. No, as much as IT is gna hurt to write that check now, it's gna hurt a whole heck of a lot more than IT will be to wait and do nothing and write check for two times, three times amount in the future.

I like that, not going straight to surgery. When should we not do this? When should someone not do this? What are those simple things to first consider before going straight surgery?

First thing is you going to be in a lower tax bracket in the future. So i'll bring up up of a recent example is talking about with someone was working, there were sixty one years old, IT was as a client. They are going to move to texas when they were tired.

They were living in california today, they were working. And and this is a little different. They were really prioritising, doing rough contributions to their, for one case, will tired to the conversion piece. Now they are working that a high income. They said, we really wanna have a tax efficient retirement and put in all their four one k into the rough for one k and we looked at, I was said, look, when you retire, your incomes going to go way down because you're not going to making the high six for your job income anymore plus when you retire your pain, nine ten percent in california state taxes today you move in a taxi in those tax, that state tax racket will go away. So why are we pain into something?

Why are we contributing to a rough account which gives no tax benefits today just so we can pull IT out in the future when we're going to be in a lower tax bracket is the opposite of what we should be doing um we should be saving money on taxes on the contribution and didn't point out in the future. So if you're in a position today where you're in a higher tax racket now, that will be in the future. A rough conversion doesn't really make sense.

Now you have to think through marginal tax break at most effective tax break, and there's some new ones to that. But if you're not going to be in a higher tax racket, some of us we don't really know because he knows where tax rackets are in ten, 10， twenty years. Um but that would be a good reason not to another good reason not to.

I don't want to take the whole talk about this, but I think this is important. You're terribly client. There is something called a qualified to distribution as talking to a client on time.

And he said he and my business, and I think we should um you know take the proceeds, put IT into a flip, creat name croat. All this is really sophisticated acks plan use. You do not rise fun as a beneficiary of this.

So well, you really want to gift a lot of money, which is incredible. Why don't inside this big, complicated estate transaction, this going to cost you a lot of money, eternal fees, and be a lot to administer? What if we treat your four one k like your do advice, not like you're giving account from the standpoint of you can gift up to one hundred thousand dollars per year from that directly to a charity.

V O is called a qualified trader distribution, and that money never has, is never packs able to you. He has gift IT right from your ear, right as supposed to to distribute IT. The bottom line is though, the the third reason now says the the main thing that prompts the need for rough conversions is this thing called required minimum distributions, which is you might look at your income in the future and say, okay, I got social security.

I've got a tension. I've got a robot to income from investments. I'm probably gone to be a low tax break, lower tax break, at least the name.

Now that may be true until you factor these required distributions, where if you've done a good job of saving and investing to pretax accounts. The arrest and congratulations, you are now required to take minimum amounts out of that each year. That number grows.

And so even if you're not, I guess, uh, directionally spending that money, there is a me some required spending of that, which could then push you into a higher tax bracket, prompting the need for rock version's day. But if you're not going to have a significant R M, D issue, that might be another reason, not too. So before I ramble on too long, i'm going to turn IT back to you to regain control over the shell.

okay. Best example on require mini distribution. This is the first year I was working with you, James. We are in the office, the office together in slam a beach. And if you remember, if you remember the name of the client, you can say that I don't know we're allowed in all that.

But if we allowed to see the name, he said, James, do you know how I know i'm doing well, you know, I I don't know and he said, it's when I know I have required minton distributions beyond what i'm gonna a need. And I remember both of us looking each other little bit being like, oh, that's a cool definition. You all client that no, I I don't remember that.

sure. Oh, I remember so clearly. So the client was like, here we are, i'm sure excited to begin discussing with clients because, you know, in person back then. And now we do a lot of our work, literally all of our work virtually resume. And I remember him saying, hey guys, I get we're going to talk about rough conversions and I get that I need to do IT not saying I want to do IT i'm saying I know i'm in a good position financially when I need to take out more than i'll ever need so yeah, this a problem but there's a good problem .

you talk about yeah, whats coming back now.

Okay, you can say if you you don't want to, you don't have to, but um IT made me think of a few things. So I had one couple I spoke to and I said, how much do wanna spend go? We d love to spend eight thousand month in a time.

I said, okay, what if I told you had to spend ten thousand months go? The house sounds cold too. And what about twelve thousand? Yeah, we can definitely do that.

I, okay. So these numbers moving pretty quickly. Here I said, what about twenty thousand? And I go, I don't know if I could spend that a amount.

I know what if I forced you to not like well, I just I mean, I guess we could do that, but I just don't think we're really need to like I would not add to our quality of life. And I said, all then, great. Maybe we shouldn't do roth conversions.

And then like, what do you mean? I thought you told me just a second ago, we have to do IT. You have this whole thing about your no brain or bracket and you felt the next bracket.

I said, yeah, but I really easy effects to decreasing the need to rock conversions is spending more money. And you just told me you want to spend eight thousand months, and then in the span of about six seconds, you are willing to spend twelve thousand a months. So we need to really determine how much you'd love spend, and you can spend more, and there is less of a need to do a rough conversion.

So fixed number one that I see is easy is spend more money. Fixed number two that I see is easy, retire earlier. I don't want someone retire too early and run the risk running out. But we also, as a true footie, our role is to go got IT.

What is the true goal of the can we act in their best interest? Sometimes acting their best interest is saying, look, you told me that you have health conditions and that you don't know how long you're going to be in the state of mind and i'm not saying this is you, James, or any of you listening right now, but all joke that i'm the minister advisor, not actually me. Okay, just transparent.

And the reason I say that is because some people, just like this couple of here, if I go back and share the screen just for this example here, they are literally asking when is the best time to do rough conversions? Already told them it's february twelve, but they didn't hear me. So now when is the best time for a couple sixty four and sixty with two and half million? And how much per year? Hey, when do you want to stop working? Hey, how much do you really, anna spend any thought? Yeah.

I think that big picture thought i'm going to come back to this is someone this might have been you this might have been someone else someone saying roth conversions worth add today and it's like, yeah, I can see what they mean by that, everyone to your points, rough conversion, happy.

And I think that there can be a problem when people think that the that the sign of a successful financial plan is the the rough convergence strap that saves you the most money, money that mean that how do you engage a success of your tax tragedy? If I can show you that this tragedy saves you two million dollars, this one saves you one. Obviously, the one of two million or savings is Better, right? You would think that.

But you then go back to what what does that mean? That means you are decreasing your personal spending, are in retirement so you can keep your tax brackets super lows, so you can create more space than than the tax brackets we want to fill up, so we can do more rock version. So don't take that trip.

Don't spend time I go to those shows with your wife. Don't do the things you want to do, because I can save you two million dollars tax instead of one minute. Well, that that's the worst of advice in the world.

We got to remember what the main goal here is. We got to keep the main thing, the main thing and the main thing is not tax savings. The main thing is live the life you wants to live.

We talk about our mission of helping people get the most out of life with their money, not necessarily just maximized ing money, but they take a maximizing money. And once you fully optimized your life, then that maximize attack savings that can be maximized from there. But if all you're looking at as a rough conversion piece, the best weight optimize that is to minimize your quality of life, minimize your own spending.

So I forget what your actual question was. I just wanted to tie that end because this should never be the primary thing. This should be a secondary thing.

You even go back to our process with clients. So where does this start? Talk about purpose.

What do you want to do? What's important to you? Then the next step is the income plan to max my income to support that.

Then the next step is the investment strategy to fall support that. Then finally will talk about taxes because that's not the first domino time. The second domino of all, it's okay once these other things have been optimized, is the order of Operations. By what you look at things. Taxes are super important, but do not ever let IT become the main thing.

I definitely think going through a brief financial example would help people understand if they should worry about conversions. So let's take this couple, Linda pickin. They've got two and a half million box, and they said they are sixty four and sixty.

Well, let's assume that arm's for them began seventy five and less, just assume their investors do really well and IT doubles and less just assume from two and half million to five million box. Seventy five, so called eleven years and fifteen years later, they've now got five million box. And let's sum IT into any conversions.

They never heard us do any episode. They don't eat any color flower. Or we've now got five million bucks at seventy five in pretax accounts. They also have social security. I have no idea that have rental income on on herriton, but I just assume so security and five million box pretax and cracked me from wrong here, I might not recall. But is IT three point eight percent that .

R M D starts in the high theories? Let's run up to force. So about like eight, seventy six, seventy seven more sumer around there. Your require distribution based on life expectancy and there's a table of the I O S uses, but call IT four percent of the amount you have to take any report folio and this two hundred thousand dollars in acting on top of social security.

And by the way, if you have two and hf million hours in your four one could get today in your early sixties IT means you've done pretty well. You probably have some broker jassem as well. You maybe have some real state assets. You maybe you quite some other things or generate taxable incomes.

So it's not just as two hundred thousand a require distribution, which by the way, will continue to go up each year in terms of how much you have to take out its social security plus dividends and interest as any other thing else you have plus that. And so what you're doing is you say, okay, what will our tax back could be in the future? And no, we don't know where tax rates are gonna be.

No, we don't know exactly was gonna en, but A, A, A, A projection is approximate right is way Better than mean precisely wrong, which is doing nothing. What tax Price are we in today and then compare the to? And if it's a much higher bracket in the future, consider conversion today.

Now the caviar to that is if today you're still working, it's not just looking at today in the future. It's also look at the in between years. Today, for example, here are the twenty two percent racket, and in the future, you might be in the thirty two percent racket. You might jump to the conclusion I should do a conversion, or maybe, but what if the next ten years during the year percent racket, because you retire and you live in a broke to council ever? So not to get two in depth, but look at the thirty thousand foot view of is my marginal tax black had expected to be each and every year, assuming no conversions, so that I know what year should I fill up, what tax brackets to Normalize or even out where i'm paying the taxes in, in doing so, potentially save a whole lot of money.

And this might be a longer episode because we just love this stuff. But I want to touch on briefly erma. Not for too long, but some people don't even know what erma is.

So I want to allow to IT because some people make the mistake of going, oh my gosh, i'm not going to do rough conversion that can increase my income. And then there's this erma thing. but. I don't know if you're talking about a hurricane or if that's something else, like am I missing here? So wanna look to that.

But at the same time, I want to bring up a huge point that you just said, which is okay, we have a tax window if we are retired sixty five, and social charity doesn't begin until seventy, and then ARM es. Don't begin till seventy five. Well, to answer this one of the questions here, you have to be working to do a conversion cannot be done after you can do IT at any time.

doesn't mean should do IT, but you can what we want. I to be working to make a rough contribution, you have to have earned income to make a contribution. You can make a conversion whenever whether you're working, not working, IT typically makes more sense of your network in because incomes lower. But you can do IT whenever .

good interaction. Please keep doing that. This on my screen, you can see here, this is an example of someone who is in retirement.

And you can see this is arma brackets. Some you are like, I know what you're talking about right now. Is that like you're unt, not my aunt James. Do my breaking down what the hack erma means when people shouter should not worry about this?

Yeah erma is um a medicare premium or not premium. It's a third charge to your premium. So when you get medicaid, there's just a cost for your party premium.

So for this year, one hundred and seventy four dollars and seventy cents, that's the twenty four number. Now that goes up as your income goes up. So you can see if you're watching on youtube, you can see this if you're listen on podcast.

Minor always checked out on youtube. James can all use the podcast or the youtube channel on. You can see the numbers are a show in here. Um once you're modified, adjust just a gross and come exceeds these are twenty twenty four numbers, two hundred and six thousand if you're married, half of that if you're single, there is a premium adjustment. Your pain in extra seventy dollars for your party medicare part b and extra thirteen dollars for your medicare part d those are months the amount so next to eighty three dollars per month as your income continues to go up, those sir, charges go up.

So not technically attacks and standpoint like an income taxes of once your income goes over threshold ve from the ten percent bracket to twelve percent, rack twelve percent to twenty two percent so and so far but IT should be viewed as like a tax because the more your income goes up, it's not just your federal income taxes that you're pain moron or your state income taxes. There is also potentially medicare premium third charges. I will say people sometimes get too hung up on this.

They think H, I don't want to a conversion because of their own master charge. One way of thinking about IT is the the top of the twenty two percent federal income tax bracket somewhat chorus finds with the top of the first ah that the threshold guage erma kickin erma kickstand, if you're married, was two hundred and six thousand, two and three thousand, twenty six thousand and above. When the first army sturge charge kicks in, the top of the twenty two percent racket from mary trying jointly is two hundred and one thousand fifty dollars to buy those numbers and half you want for single.

So if you're just convert in to top the twenty two percent and racket each time you're not cross that threshold, the thing to be mindful of them, this is where are probably gna lose people on his kids. confusing. And I get that is one is measuring your taxable income.

One is measuring your adjusted gross income, your modified adjusted uh, gross income. So that's what it's a little bit more technical than is onna work out to describe on a podcast episode. But do your tax prep when you do this because I have good one for that.

Yeah, so that's the equivalent of when I went to go get a surgery that I ended up not getting and do a separate aisou on that in the future if you guys really wants to know which you guys can let me know the comments if you care or not, I won't be offended either way.

But we were debating which part of my hip should we attack from? Is IT from the back of the hep? Is at the front? What's going to create more scar tissue? There's a level of this where when I go to my surgeon, i'm deferred to him who's seen the inside of hips and what creates most art tissue.

So the risk to this, in the same example, just shared their dreams of modified the justice irs and converse taxable income. Some people they know enough to be dangerous. And a lot of you guys listening are trying to optimize your financial strategies.

So are not matter you. But you often say, oh my gosh, i'm retired, i'm sixty three. I'm going to go do a rough conversion. And then two years later, you get all mad at me and hey, what's what's going on and and you're like you didn't tell that this two year look back thing and an impact like medicare and my this my there are so many different things, James, I try to pick and shoes what's going to be the most being for your balcony y episode so not going through every single thing there but I hear you .

yeah i'm i'm i'm google. And as we speakers a form you can actually file to say, like there is a to you look back, which is the house is called, you can go tell social security, look my income for this.

For example, if your income two years ago three hundred thousand dollars and year turning sixty five, you're going na have an armor charge on your a medicare payments this year unless you proactively go to social security and trying to look up the form as we speak. S S, A dash four four. I believe IT is where you can say, look, that was two years ago.

And so you're exactly right. But you can be proactive about IT, which is a great thing to do to see this year is actually can be one hundred thousand, so that search charge shouldn't apply. But yes, that's that you gotta keep both in mind. awesome. I know we have to pick and choose our moments.

and you're already yet twenty four, twenty five minutes in here regarding roth conversions, any last things you want to leave people with. Regarding legacy, when can people do those q cds you are talking about?

Q, C, D, you can start doing as as soon as age seven. Half required distribution. Start to age seventy three or seventy five depending on your birthday. Used to be seventy two before that is be seventy. Have um there's a lot I think that the main thing I could talk at all as before just jumping into them because IT seems like there's almost the really dop me i'm doing something proactive i'm doing. I'm getting the surgery in thinking this can be OK make sure is the right thing to do.

There is a lot of cases where it's not you know that has Better now when required million distributions aren't gonna be an issue like I just see too many people convert too much up front and you probably have been fine with you or no conversions or just at least a lesser amount. There's another thing called a social security tax torpedo where the way social security is tax is um it's basement called your previsional income. And as your taxable income increases or is your previsional income increases, more and more of your social security benefit is pulled into your taxable income calculation and so what happens if you could be in the twelve percent racket but there is a social security tax torpedo zone where I got a video trail.

Link the show? Not here, right? Walk to this probably way more clearly than describing IT here.

Not only are you converting, doing a rough conversions, the twelve percent bracket teams like a no brain or beer, also points of your social security and your tax point come and then paying tax on that too. And you're effectively paying a twenty two point two percent tax. I believe IT is supposed to just twelve percent fatally.

So I did. The main thing is really make sure writing for many people's absolutely the right thing. It's no brain, or you should one hundred percent do IT. I just see too many people were not, and they waste money when IT wasn't required. Love IT, i'll leave you always unless.

James, you have anything, you are time. And after this, with the color flower example, which I share a lot, I don't have the shirt on me, but it's one of my favorite gifts i've received where all explain a conversion like eating color flour or a little bit of vegetables today to avoid having to eat a ton of color flower in the future.

And I don't want any of you guys to be go and oh my gosh, sh my whole retirement and to eat so much vegetables, which is paying a lot in taxes. Now some of you who are like, I like cosa is a terrible example. Tell me which vegetable you'd prefer and next time, maybe next episode, James, i'll wipe out the so everyone gets to see that but that's all i've .

got on conversions that's IT yeah for the you may you share this but when you proposed to Alice, we sent Alice a digue ve roses, an area of the guy ve color flower and I don't if you ever ate IT, avoid that when IT doesn't yeah .

that's uh that's my best man at the wedding screaming the color flower love IT cool.

That's all I got anything else for you no, that thing i'll says yes, this is being posted on my youtube channel just to show people are confused. Has a podcast or early retirement podcast will have a link out to that. Make sure you listen there.

I had a podcast ready for time. Podcast will link up there. We both have been working together for a very long time.

Different shows people know if we worked together. So we're not doing this together and want to make sure that people know me also know ari in vice per. So um we are good to have links to that and we will see all next time love you guys.

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