sharing or or any AI tools uh without prior consent. And again, we appreciate your understanding and I’m so glad you’re here. And also, I just want to mention a few resources here available uh at Alliant. So, our team at Alliant Retirement and Investment Services is really focused on helping you understand the ins and outs of investing, saving for retirement, and just so much more. So you can visit our website aris.alliantcreditun.com
to see our list of weekly webinars, our podcast which is called investsavvy, our blog as well as some other financial resources. So with that being said, let’s uh get started here. All right. So before diving in, I want to start with the future tax environment and how budget deficits, entitlements, and taxation affect Roth IAS.
So, this is the current national debt, $39 trillion, uh, just over $39 trillion as of this week, which translates to about $115,000
of debt for every single person in America. Now, this is just a staggering number, and honestly, it’s it’s I don’t think going to get any better. So, as we look at the budget deficits, for example, over the last 10 years, what you’re going to find is that they’re on average about a trillion dollars most years, more or less. And I’m really talking about 2014 to 2024. When you get into 2020, what happened? We all know that COVID hit and all of a sudden we go from a trillion and those types of deficits to three trillion pretty much overnight. So you have that in both 2020 and 2021. And then that deficit spiked up and so far hasn’t come back down. And that’s caused a pretty sharp increase in the overall debt again, which is about $39 trillion as of this week. And maintaining that debt when interest rates are low is one thing, but with interest rates rising, the carrying cost of that debt is going to be very burdensome for a lot of us, right? And let’s look at how that’s affecting entitlements. So, Social Security, Medicare, and Medicaid, as well as the interest payments on those debts, consumes all the tax revenue that you have coming in. And according to the Congressional Budget Office, that’s actually going to happen in 2035. So just less, you know, than 10 years from now, we can consider the impact of that in another 12 to 13 years. It leaves nothing for everything else like health and human services, highways, defense, and all those other things. And that that becomes problematic. So, if you’re the government, there are really only two things you can do to counteract that problem. Number one, you can cut spending, right? Or what we’re most likely to see is taxes being raised. Good old Uncle Sam probably starting with those highest earners, but at some point trickling down a bit lower. And it’s the middle and middle high income people that will eventually feel that impact.
Now, in my business over the last 20 years of retirement planning, one of the troubling aspects of IRA planning is that the tax rate on your future distributions is unknown. It’s that big unknown. Even if you can project your income with relative confidence, there’s just no guarantee that tax rates will remain at the same levels that they are today. And while it’s hard to find someone who doesn’t think they paid too much in taxes now, the reality is that the top tax rates today are pretty low in a historical context. And that’s, you know, talking to clients over the years, that’s something that a lot of them don’t realize. You know, if you just take a look at this chart, uh, to see what I mean. So back in 1913 when the tax rate uh income tax rate was first introduced the top rate was only 7%. But within just a few years the top rate had already skyrocketed to over 70%. Unbelievable. After dropping back down to as low as 25% after World War I, the top rate jumped to 63% in 1932. And from there, it wasn’t until more than 50 years had passed when in 1987, the top tax rate finally dropped back below 50%. Letting those in the top bracket keep more of their income than they were forced to give uh over to Uncle Sam. So, it’s it’s just crazy over the years to see how tax rates have changed. So, right now, and we’re in some very historic lows. And now, of course, not everyone pays that top rate. In fact, it’s only a very small percentage of taxpayers that do. And that said, with our national debt at all-time highs, a budget that hasn’t been balanced in years, and fiscal troubles for many of our entitlement programs like Social Security and Medicare, it’s possible that rates could go up across the board. So, that makes coming up with the right plan even more important.
So how do I help clients and you know as financial adviserss how do we help clients guard against that we talk about diversification right as many of you heard of investments and then that’s important but we also need to talk uh about and take a look at diversification from a taxation standpoint and that brings us to three areas tax now tax later and tax Never. So, let’s take a look at tax now vehicles. These are things that are going to be your what’s called non-qualified assets that are, for example, in managed money mutual funds, stocks, bonds, and CDs and those sorts of things. Then you have the tax later options which include tax deferred vehicles like putting money into your IAS, uh your employer’s 401k, an annuity for example. And then what I like the most is the tax never options. That’s going to be things that have a big tax advantage. And we’re going to be talking mostly about Roth IAS today. Obviously, that’s our topic of conversation. But in addition to that, something like municipal bonds or HSAs, those health savings accounts would have a a tax-free fe uh feature as well. uh as well as life insurance which might be another uh good option.
Now if approached correctly, Roth IRA conversions can be an effective strategy in that effort to keep as much after tax and taxfree money as possible, which is what we’ll dive into today.
Now today we’re going to take a look at a few important issues that must be considered if you want to even consider a Roth IRA conversion. First is absolutely the basics behind a Roth IRA conversion and what that is. Second is considerations for the original owner of the Roth IRA. Third, we’ll take a look at the sur uh considerations for the surviving spouse of the Roth IRA owner. And then finally we’ll talk about uh the considerations for the beneficiary or beneficiaries of the Roth IRA.
So I like to take it from the beginning. Let’s start with the basics.
So many of you probably know that there is another type of IRA called a Roth IRA. Okay, Roth IAS are similar to your traditional IAS in so many ways, but there are also some very key differences. And one of those differences is that you do not get a tax deduction when you make a Roth IRA contribution. Again, you do not get a tax deduction when making Roth IRA contributions. Once your money’s in a Roth IRA, it grows tax deferred like it does in a uh traditional IRA. But I want to say that the big benefit of the Roth though and another key difference between it and the traditional IRA is that Roth IRA distributions can be taxfree in retirement. Again, Roth IRA distributions can be taxfree in retirement. So, if you’ve had any Roth IRA for more than 5 years and you’re over 59 and a half, then all withdrawals from any of your Roth IRAs will be taxed and penalty-free as part of what’s known as a qualified distribution. That’s very important. As long as you’ve had that money again in that Roth IRA for five years and you’re over age 59 and a half, then any withdrawals or all withdrawals of your Roth IRA will be tax and penalty-free. So even if you need to take a withdrawal sooner, you can always take out of your Roth IRA contributions tax and penalty-free.
Some of the same contribution rules that apply to the traditional IRA contributions also apply to Roth IRA contributions. For instance, the same $7,500 contribution limit applies for 2026. Similarly, if you are over uh 50 or older by the end of the year, the contribution limit is increased to 8,600 thanks to the 1100 catchup contribution. Now, Roth IRA contributions are also subject to the same compensation rules as IRA contributions. So if you have sufficient compensation, then the only thing that can prevent you from making a Roth IRA contribution is having too much income, which is not a bad problem to have, but in terms of contributing to a Roth, you have limitations. So you can see the income limits up here on the screen. And note that if you’re a single filer, as long as your income is under 153,000, you can make a full Roth IRA contribution. And similarly, if you’re married and filed a joint return, then as long as your income is under 242,000, you too can make a full Roth IRA contribution.
Now, while some baby boomer couples retire at the same time, often times one spouse retires before the other. And in such cases, you may be able to take advantage of what’s called spousal IRA and or Roth IRA contributions. These are special contributions that allow a spouse with compensation to make a contribution to the traditional IRA or Roth IRA of a nonworking spouse. So in other words, the non-working spouse can use the working spouse’s compensation as their own and the spouse for whom the contribution is being made, however, must meet all the other contribution rules applicable to that type of IRA.
So again, a Roth IRA con uh conversion is the name that’s given to a special type of transaction where you move money from your pre-tax retirement account like an IRA, a 401k, uh 403b to a Roth IRA. When you make a Roth conversion, the amount of money you convert is added to your tax return for the year and is taxable at whatever income tax bracket you happen to be in at that time. So, for example, let’s just say Jill here has $100,000 in a traditional IRA and would like to convert it to a Roth IRA, which we’ll we’ll talk more about why she might want to do that here in a moment. But if Jill moves forward with her $100,000 Roth IRA conversion, she’s going to have to add $100,000 of income to her tax return for that year, which will be taxable at whatever rate Jill happens to be at, which again could be significant. And that’s why because this is a big decision and can have significant impact on your taxes, please always discuss this option with your tax advisor beforehand.
So, why would you voluntarily choose to make one of those Roth IRA conversions and pay taxes to Uncle Sam before you have to? Well, there are a lot of reasons, but perhaps the most common reason is one we’ve already discussed to pay off Uncle Sam now so that you don’t uh so that you own your retirement account free and clear for life. And remember, with a Roth IRA, you have the potential for future tax-free withdrawals of everything in your account. If you’re 59 and a half and over and you’ve had any Roth IRA for more than 5 years, then remember, all withdrawals from any of your Roth IAS will be tax and penalty-free for life. And if you’re over 59 and a half, but haven’t had a Roth IRA for 5 years yet, you can still take out any of your converted amount tax and penalty-free at any time. Just unfortunately, if you’re younger than 59 and a half, other rules apply.
Something else to keep in mind is that unlike Roth IRA contributions, there are no restrictions on who can make Roth IRA conversions. And this is a big one. You can’t be too old, you can’t be too young, you can be working or you can be retired. There’s no minimum amount of income you need or a maximum amount of income you can have. I think you see what I mean. If if you want to convert uh uh your IRA to a Roth IRA, there’s nothing in the tax rules that will stop you from doing so.
Now, the Tax Cuts and Jobs Act, however, eliminates what’s called the Reccharacterization option for conversions made in 2018 and later. So, just to go back a bit, before 2018, if for example, you decide to convert your traditional IRA to Roth, you were able to change that back for, you know, reasons if you wanted to. However, now, if you convert your Roth IRA uh now or in the future, you’re pretty much you’re stuck with that decision.
Now, another big benefit of the Roth IRA, and one that many retirees find attractive, is that Roth IRA have no required minimum distributions during your lifetime. Uncle Sam cannot force you to take money from these Roth IAS, unlike your traditional IRA. Remember all those RMD calculations and potential mistakes we talked about earlier? They’re not an issue if you have a Roth IRA. During your lifetime, you can take as much or as little as you want. You’re not forced to take anything at 73 if you don’t want to. That means your Roth IRA can continue to grow and compound tax-free for you and your heirs, which also makes it a very intriguing vehicle from an estate planning perspective. Uh, which I see very often uh here at Alliant.
The potential tax-free nature of the Roth IRA may also provide you with additional benefits such as a hedge against tax rates rising in the future. Like I discussed before, we are at historically low tax rates. So, when it comes to your retirement, there are a lot of unknowns like what are the markets going to do? What’s inflation going to be like? and what will your tax rate be? That last one, taxes, which you hear me talk about a lot, is a major concern for many retirees and one we’ve already talked about a bit. A Roth IRA conversion can help manage that risk by paying taxes at today’s known rates. If tax rates rise in the future, tax-free distributions from Roth IAS will be even more valuable for you. Of course, if you think your tax rate will be lower in retirement, then that would be an indication that maybe this strategy is not right for you. Also, uh since Roth IRA distributions in retirement are generally tax-free, they typically don’t impact the other things tied to your income that we discussed earlier.
So, we’ve talked about the benefits of a Roth for estate planning purposes, but it also has ancillary benefits, including the impact on social benefits. By social benefits, we’re talking about social security, Medicare, etc. Think about an IRA. The income is 100% taxable. It’s included as provisional income for social security purposes and it’s included in modified adjusted gross income for Medicare purposes. The same income coming out of a Roth is not taxable. It is not included in provisional income and is not included in modified adjusted gross income. So, when it comes to pricing, you know, how much benefits are taxed and how much your government benefits cost, the Roth brings those big advantages.
Now, before we continue with a Roth IRA conversion example, please remember that converting a traditional IRA or an employer plan account like 401k to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences, including but not limited to a need for additional tax withholding or estimated tax payments, possibly the loss of certain tax deductions and credits, and higher taxes on Social Security benefits along with higher Medicare premiums. So again, I can’t stress enough, please be sure you consult with your qualified tax advisor before making any decisions regarding your IRA. And keep in mind that for those of you uh thinking about converting a traditional IRA annuity to a Roth IRA annuity, while maintaining all of the features of that annuity, the taxable amount will be the contract value plus the actuarial present value of those additional benefits. So, it is generally preferable that you have funds to pay for these taxes upon conversion from funds outside of your IRA or employer plan account. So, if you elect to take distributions from your IRA to pay the conversion taxes, please keep in mind the potential uh consequences such as an assessment of product surrender charges or additional IRS penalties for these premature distributions.
All right. So, Roth IRA conversions may be able to help you keep more money after all the taxes have been paid. So, let’s take a look at a hypothetical example of someone over that age of 59 a half considering a Roth IRA conversion of $10,000. We’re going to assume that the marginal tax rate now is at 12%. Like you see there on the left and the tax rate later when it is taken out will be 24%. On the other side of the the teeter totter there. If this individual does not complete a Roth IRA conversion and just continued to let that pre-tax money grow for another 10 years at a 5% return, you can see there they’ll have about $16,289.
Then if they take the money out and pay the income tax of 24%. They would have had $12,380 left over, which is the after tax value there. However, if they chose to complete a Roth IRA conversion, they would have to pay 12% of the money in taxes and would have only 8,800 left in the Roth IRA. So you think that doesn’t sound too good. Assuming again annual growth rate of 5% per year for 10 years, they would have $14,334 that they can access income tax-free since this Roth IRA owner owner is over 59 a.5 and they meet that 5-year requirement. So that’s potentially $1,954 more or 15.8% more if they complete the Roth IRA conversion and just pay that income tax now instead of keeping the pre-tax money in the retirement plan or IRA and pay the income tax later when they withdraw the money. You can see how powerful that can potentially be.
Now, this chart can help you understand how a Roth IRA conversion might help given those various tax brackets both now and later. So, as you can see, see moving across the top there in that blue bar, uh, is where you’ll find the current marginal tax bracket. So, in this example, let’s just say it’s 12%. Now, if we move down from there, you can see how much a Roth IRA conversion might help. Later, this money would be taxable at 24%. Okay, a Roth IRA conversion can help you end up with 15.8% more money after income tax. So again, very powerful what these conversions can potentially do. And this next chart, I just wanted to share uh this slide to show you that we have specific financial planning tools that can help determine your specific effective tax rate at specific times of your life. So obviously, you know, this is not a one-sizefits-all model. So we can get down to the accurate details of how taxes will potentially look for you come retirement down the line. So again, this is an example of what I deal with with clients when they ask, “Well, how’s my tax situation going to look when I’m, you know, 74 or, you know, 78?” This is how we can get into those accurate type of uh details down the line.
So whenever a Roth IRA conversion is considered, you must consider two tax scenarios. The first is how the future tax situation might play out without the conversion. And then the other is how the conversion will impact today’s situation relative uh with to your income taxes, your Medicare premiums, and potentially your 3.8% what’s called net investment income tax on some of your holdings.
Now, reducing the amount of tax paid may mean more money for retirement expenses or for passing along to your beneficiaries. And here we can see how much ordinary income a married couple, both over age 65, can absorb in the various tax brackets. And so, some of this might apply to you. So, in that first 10% uh bracket, you can absorb up to $57,50 before moving on in to that 12% bracket. If you fall within that 12% bracket, you can absorb $130,000 just over that before moving to the next 22% bracket. And then finally, you can absorb up to 239,000 before moving up to the 24% bracket. So again, just to show you how these brackets work in terms of uh the potent the income that you’re currently currently receiving and how much you can absorb moving forward. This can be a very important uh decision uh to make when uh considering Roth conversions.
So, this is what I like to call a a savvy conversion strategy. Uh, that might be helpful helpful and we call this the filling up the bracket strategy. So, remember those tax brackets we looked at earlier? Well, sometimes you can find yourself in the middle of one of them with room to add more income without pushing yourself uh and spilling over into one of the higher tax brackets. So let’s take for example in 2021 the 22% tax bracket for married couples filing a joint return goes from about 81,000 to about 172,000 that year. So 81,000 to about 172,000. Suppose then that you file a joint return and your taxable income is $100,000. That means that you can add another 72,000. Remember the $172,000 is that limit for the 22% bracket. You can add another 72,000 of income without going into that next bracket. Making a Roth IRA conversion of that remaining amount could make sense to you. Now, if you plan to convert a sizable portion of your IRA, this approach is often more tax efficient than converting the full amount all at one time. So, instead, you can make smaller Roth IRA conversions over a number of years, filling up your bracket each time. This can help reduce the average tax rate you’ll pay on that converted money and also just spreads out the tax bill over a longer period of time, which clients like to see. You’re not taking one big tax hit all in in that one year.
Now, Roth IRA conversions can be especially useful if you have uh had a low income year. So, say for example, you’re a business owner with unusually low sales or are you paying high non-reoccurring medical bills or maybe you’re retired but not yet receiving social security benefits or pensions or IRA distributions. These are the type of questions to ask to see if a Roth IRA conversion is a good move for you. And again, here at Alliant, we can certainly help with determining if that’s appropriate. All right. Now, moving on to the original IRA owner. That’s a beautiful picture there, by the way. Once you reach a certain age, the law requires that you begin to take what are known as required minimum distributions or RMDs for short. You take these from your traditional IRA. The same rules generally apply to employer sponsored plans like 401ks, too. RMDs are simply the bare minimum amounts you’re required to take from your retirement account each year to satisfy the tax code rules. And again, this section is uh an important uh topic, these RMDs, because as you go get older into retirement, you’re going to start to hear that term RMDs. RMDs. The specific age when you must begin taking these RMDs depends on when you were born. Okay? So, if you were 72 or older as of the end of 2022, some of you should already be taking RMDs uh from your IAS. For those of you who are still younger than 72 at the end of 2022, you’ll have to start taking RMDs when you turn age 73 or 75 depending on when you were born again. So, as you can see here on the bottom of that screen, for those of you born from 1951 through 1959, you’ll start taking RMDs at age 73. And for those of you born in 1960 or later, you’ll start taking RMDs when you reach 75. That is un unless Congress changes the rules again between now and then. And just a final thought before we move on, remember that you can always take more, but if you fail to take at least uh that minimum amount that they require, the good old IRS can actually hit you with a 25% penalty for any amount that you should have taken but didn’t. So again, that’s very important to take the minimum required. You can always take more, but do not take less. Now, of course, most people don’t think about things in terms of factors or life expecties. So, I put together this chart here that I think you’ll find helpful. It shows the approximate percentage you need to take out of your IRA from age 73 to age 90 in order to steer clear of that 25% penalty. If you look, you’ll see that each year the percentage you need to take out increases. Now, just because the percentage increases, that doesn’t necessarily mean you need to take out more money each year than the last, as that also depends on how much your IRA gains or loses from year to year.
Now, since the RMD age has increased to 73, it may be tempting to simply delay all that IRA withdrawals until then. And while not everyone will be able to do this, those that can should be aware of rapidly growing distributions that might move them into these higher tax brackets. So again, this graph illustrates the required minimum distributions at various ages. And again, assuming that the initial IRA balance is at age 65 and earns 5% a year, this just shows how your RMD can possibly affect your tax situation as those IRA balances grow over time, which hopefully they should.
Now, this graph illustrates the increase in RMD amounts when compared to inflation. This assumes that the initial IRA balance here is $1 million at age 73 and earns 5% a year and an inflation rate of 2.5% and that RMDs are taken out at the end of the year. So if we assume that tax brackets and deductions are adjusted at the rate of inflation and if the RMD amount is increasing faster than inflation, it could push the taxpayer into a higher tax bracket. Now if this seems likely, Roth conversions and other strategies should be examined as part of a draw down strategy. And again, working with the tax professional should always be considered before taking any action to manage any tax strategies. So therefore, appropriate Roth IRA conversions before these RMD distributions uh be build too high could be a viable strategy to help you keep more of your money after income taxes have been paid. Now, this next slide uh is something I get excited about. This is an example of a married couple, Bob and Mary, who are both retired at age 65 and living on their social security and pension. Okay? And I have to mention this slide, by the way, is a sample from an actual retirement plan uh that I created for a client. You can see here the the dark blue, navy blue that’s consistent across the board is social security. The teal green is uh other income such as in uh pension. And then when you see those dark orange bars there, that represents the RMDs that they’re going to have to take out of their IAS come 73. So you can just see here how that income jumps. Whether you like it or not, this is going to happen at some point if you own traditional IAS or 401ks. So based on that info, you can see that their tax liability is going to increase as well based on those RMDs. So with Bob and Mary, assuming they live to age 95 down the line in uh 203, they would have paid total taxes in the amount of $832,000 that you can see there. Until you see these numbers in front of you, it’s you don’t believe it. $832,000 in total taxes. But now let’s consider Roth conversions. This is another slide that was taken uh from a part of the actual financial software uh and financial plan that I used to help determine how much to possibly convert based on client specific tax situations and retirement assets and in my opinion a very powerful tool that I use consistently from week to week as a financial adviser. By doing these Roth conversions, you can see that the red bars are those additional are the additional taxes that Bob and Mary would have pay in the first few years. But then you look at those light gray bars, that’s represents less taxes they would pay in those later years. And the impact is powerful. In this example, by initiating a Roth conversion, my clients save almost $142,000 in taxes over their lifetime. And they increase, you can see there on the right under total portfolio, they increase their overall wealth in the long run by almost $830,000.
When I see this in front of me and when I’m dealing with clients, this will show you, first of all, thanks a lot, Uncle Sam. and that’s how you’re trying to get me. But there are tools to help mitigate this. So, I like to say these financial plans uh are like tax uh retirement tax blueprints. They give you a snapshot of how your tax situation can potentially be mitigated by these Roth conversion strategies.
Now, let’s move on to the surviving spouse.
In this hypothetical case, we see Adam and Ann’s income. Assume they have 58,841 of ordinary income from their IAS and or pensions and they have $60,000 of social security retirement income in their married filing joint tax status. You can see there they would have paid $8,841 in total income tax.
Now, if we look at this example with Ann filing as a single taxpayer, she would lose a social security check and need to withdraw 98,935 in order to pay the increased taxes of 18,935 that you see there and keep the after tax income the same. So here the IRA withdrawal would increase 68%. And the taxes would increase 114%.
While Adam was alive, they were in the 12% marginal tax bracket and with Adam gone, Anne is in the 24% bracket.
So again, appropriate conversions before the first death could be a viable strategy to reduce taxes for the surviving spouse and give him or her access to income tax-free income.
Now moving on to the home stretch uh onto beneficiaries to finish our discussion here. Let’s look at a hypothetical example of Carrie. Okay, she’s 45. Assume she has in uh hasn’t inherited uh a $1 million traditional IRA from her deceased mother. She doesn’t need the money uh the money now and doesn’t want to increase her taxable income. Under the old rules, she can stretch the withdrawals and would only need to take out $25,773
as an RMD in this first year. That was under the old rules. Under the new rules, if she were to withdraw evenly over 10 years, that’s the magic number, 10 years, she would take 123,338
a year, which is a significant jump, obviously. So, in this hypothetical example, let’s look at the taxes on this inherited IRA, assuming Carrie is single and she has taxable income of $90,000 a year. Without the inherited IRA distributions, Carrie with her work income is in the 22% bracket. When Carrie adds 123,328 to her taxable income, now she is filling up the 24 uh 24% tax bracket as well as adding income in the 32% bracket. In this simplistic example, Carrie would pay over 310,000 on the inherited IRA over the 10 years of distribution. And believe it or not, these are the type of real life examples that we see here, you know, consistently with clients.
And here’s one final hypothetical example to help illustrate this. Let’s assume mom and dad have an IRA that will most likely go to their son as beneficiary, sole beneficiary, and they’re thinking about converting $50,000 a year for the next 5 years in their 12% federal tax bracket. Their son, who’s working, is in a 24% bracket and will most likely stay here. In this hypothetical example, we see that without the conversion, mom and dad will have access to more money than their beneficiaries because their tax bracket is lower. If however, mom and dad uh decide to do conversions at their 12% tax bracket, their access remains the same, but the beneficiary values increase because the tax was paid in a lower bracket. After 10 years, the converted values for the beneficiary are about $56,000 more than the unconverted values of $56,259. And after 20 years, this increases to about $110,000. So, two things to note. First, in this case, doing Roth IRA conversion, it did not reduce liquidity for mom and dad as as indicated by uh that red dotted line there. And second, the beneficiary received more because the taxes were paid at a lower tax bracket as indicated by the dotted orange line, which is a little bit hard to see because it’s kind of under that blue line.
Now, here are some considerations of Roth IRA conversions. Just some bullet points here. Again, there’s no income limitations on Roth conversions. Conversions are taxed at ordinary income tax rates. Keep in mind the deadline of December 31st. There is no pre-age 59 additional tax on conversions and no um as we’ve mentioned previously, please be aware of the unintended consequences of Roth IRA conversions such as increased taxes on social security benefits and Medicare.
So again, just a quick summary what I think are the most important bullet points before we finish here. First, future tax uh the future tax environment is uncertain but points to potential higher taxes moving forward and these Roth IAS can be an effective tool in diversifying tax allocations. Also, Roth IAS are not subject to RMDs, which is huge and can be effective in managing many risks to the retirement assets. These are some of the most taxefficient assets to leave to your heirs. And then finally, Roth conversion strategies are just an important consideration in any retirement strategy. And I’ve found this to be very prevalent here over the years uh as a financial uh adviser here. So, at the end of the day, we’re here at Alliant to help. You know, I’ve been here uh for most of you or some of you who know me, I’ve been in this business for over the last 20 years. 17 years here at Alliant and my focus as a financial adviser has been on helping clients navigate through retirement and pre-retirement. So, I know most of you might have a lot of questions, especially pertaining to your specific retirement and tax situation and possibly other topics dealing with maybe social security and your other employer plans like 401k or pensions. And again, that’s why I’m here. That’s why the adviserss at Alliant are here. We’re here to be a trusted resource to help you answer questions regarding financial planning and the topics under that large umbrella such as Roth IAS and IRA, social security and pensions to name a few. So, in a minute here, I’m just going to uh ask you to answer a quick poll after this presentation because it really helps me with my efforts uh to educate our clients and members on financial planning topics, Roth IRA conversions, just being one of many. So, when you complete the poll, uh there’s a section that’s going to ask if you’d like a follow-up meeting with me personally, whether that’s just a phone call or a Zoom meeting or in person. This is complimentary. It’s no obligation. Uh it’s a service that we offer here uh where during our meeting, we can talk about your specific retirement planning needs and how this will affect this next chapter of your life if it’s retirement. So coming out of that meeting, we can act as your resource and at least help you determine how your retirement looks based on how Roth IRA conversions can affect your specific in uh situation. For example, naturally, we can help you with the key financial planning and investment advice uh that relates to your situation, too. We just want you to be prepared and organized for uh this next aspect of your life so you and your family can have that peace of mind knowing that you’ve got a plan for making most of your retirement accounts. So if you could please help and answer the poll, I would greatly appreciate it as I appreciate all your time today. Uh that concludes my presentation and would love to open it up for some Q&A. I see that uh we have a lot of questions coming in. So uh let’s see if we can answer some of these or most of these. Also, I’ll leave my contact information here for you uh if there’s any questions that I can answer offline. So let’s start with the questions. So how do you coordinate RMDs with social security timing? That is a great question and this is where planning genuinely gets complicated. So if you delay social security to age 70 to maximize your benefit, for example, you may have that window between 65 and 70 where your income is low, making it an ideal time for Roth conversions. But delaying social security also means you’re going to get a larger check combined with those RMDs after 73. So, it can definitely push you into that higher bracket. Um, and remember that up to 85% of social security benefits are taxable once combined uh income exceeds that 44,000 for a married couple. So, these are the type of numbers that we can work with you to uh assess to see what’s appropriate uh for your uh RMD strategy and and Roth conversion if necessary. Is there a chart, Sharon asks, on average Roth interest rates? Unfortunately, no. And I’ll tell you why, Sharon. So, it’s it’s not the Roth per se that you know offers these interest rates. If you think of a Roth IRA, just like a traditional IRA, all that is is essentially a shell, right? It’s the a it’s an account that is a shell that is used for, you know, different tax purposes. traditional and Roth IRA, it’s what goes inside that shell or that account that is going to determine in interest your interest rates uh your performance. So for example, if you have a Roth IRA or traditional IRA with a credit union, say in a savings account that’s earning 3%. Right? So essentially, if you have a Roth IRA, you can go on our website, uh Alliant Credit Union, and see what the rates are with with share certificates and whatnot. If you have an investment IRA that can be performing based on an index like the S&P or different mutual funds. So Sharon, all that Roth IRA is is is a shell and what goes in it or you know the the holdings that are in that whether it’s stocks or bonds, mutual funds, that’s what’s going to determine your uh performance on that account. So that’s a great question.
So if I open a Roth today at another question and five years later I want to take some money out even if I have contributed in 2 to 5 years that withdrawal rate is taxree. Yes, as long as you’re over 59 and a half your contributions are tax-free. Sorry Uncle Sam, you’re not getting anything out of that. Um let’s see here. Nancy asks, “When you withdraw from a Roth, I know it has to be in there for 5 years plus age 59 and a half. So for contributions made prior to 2021, can they be withdrawn, but funds after cannot until they’ve been in there for 5 years or is the 5 years after the account is opened?” Nancy, great question. That 5 years is after the account is opened. Okay. So again, that will apply to you uh just on contributions if you decide to take money prior to 5 years. It’s 5 years when the account was open. Okay, Fred asks, “K1s don’t arrive until after January 1st. This makes figuring one’s tax bracket difficult. Suggestions, Fred, great question. And K1’s, at least for me as an adviser, can be a nightmare. And that’s why when you have uh K1 statement uh tax statements, that is where you definitely have to uh work with a tax advisor to determine how that is going to affect your tax situation. Because for those of you who don’t know, K1s are are different tax um uh similar to 1099 tax form that are used for different other types of investments. And again, that’s a whole another can of worms uh when it comes to your tax situation, Fred. So, uh, absolutely work with a tax adviser to determine what your, you know, potential tax, uh, bracket’s going to be, and then we can determine if a conversion is going to be appropriate. So, Bet Betsy, do you convert each year into the same Roth account or do you have to open new accounts each year? Well, guess what? That’s entirely up to you. We have clients that have numerous Roths. Um, you know, and later in retirement, from a logistical standpoint, you it might be uh, you know, wise to have fewer Roths, but it is entirely up to you. I have clients that have five to 10 Roths spread out, right? But in terms of your contributions, you can only make up to those limits each year. I mean, you can convert as, remember, as much as you want. Um but when it comes to contributing, you cannot exceed those contribution uh limits each year. But that is a great question. Um so no, you do not have to open a new one. You can keep those Roths uh in the same account each each year if you decide. Janette, me and spouse earns 150,000 plus a year, but we pay tax on tax season. Our tax preparer asks us to stop contribution for our Roth. Is this correct, Janette? That is a another good question. But your tax advisor knows better than I do for your specific tax, you know, situation. So, if he asks you to stop contributing to a Roth, I think that’s correct because he’s looking at your overall picture. And if he’s asking you to stop contributing to a Roth, I don’t know if it’s because he wants you to contribute more to traditional so you can take that as a deduction that year to lower your taxable income. You know what? So I’m hardressed to uh go against what a uh tax advisor says about your situation. Um so again, I think it would be wise to go to him and say, “Well, why why do you want me to stop, you know, conver uh contributing to a Roth? uh is it because you want to take tax deductions from contributing to a traditional IRA instead? That might be what he’s uh looking towards and maybe why he’s making that recommendation. These are great questions. I’m telling you, you all are keeping me on my toes today. Um here’s a question from Mike. How do I determine or how do you determine whether I should convert and how much? Again, this is uh what I mentioned in in my presentation is it is really specific to your tax situation uh and whether or not it is going to be wise to do that because again for some people I I get clients in here that says well Sean I want to convert you know I heard that’s that’s how you lower you know your income tax. Yes, up to a a certain extent but if it doesn’t make sense for you you know if you’re already in a high tax bracket it will not make sense. And you know, Mike, this is a uh found a very good question, but a solid answer involves a few variables, right? It uh involves your current marginal tax rate. It can uh it’s it deals with your projected rate in retirement and the number of years a converted dollar has to grow tax-free. So again, these are the kind of things uh that we can assess for you uh in our complimentary financial plan that again will speak volumes for your situation. So, oh, here’s a good question. Are investment options the same in a Roth 401k versus a uh traditional 401k? Yes and no. And I love this because many people don’t know this. If you’re still working, you know, for many of those of you who have had a traditional 401k, it’s usually traditional 401k. Over the last decade, many employers now have uh Roth 401ks. So, the good news about 401 uh the Roth 401ks is there are no income limits to contribute to this. So I would find out if you work at a company that offers 401k, does that company offer Roth 401k? This is something that you can put in again after tax dollars that will be tax-free for later your contributions. Um but in terms of this original question, are the investment options the same? They can be the same, they can be different. It’s entirely up to you. it is on your discretion to determine okay do I want to put money aggressively into uh you know a 2040 target date fund or if I’m if I’m more riskaverse I can put those monies into more bond funds you have that flexibility um again based on the selections of investments in that 401k let’s see oh Betsy was asking please clarify so employer Roth Betsy I want you to find out if your employer offers Roth 401k because you know what even though you don’t have income limits uh to to contribute you are bound to the uh 401k contribution limits each year. So those two are very different and I’m going to um pull something up really quick here just so I can talk to you. And so for 2026, the 401k contribution limits is 24,500. So what I was saying, uh, Betsy, is if your company offers that, you have the ability within your company plan to contribute up to 24,500 in a 401k. If you were to open up a Roth IRA outside of your employer plan, you’re bound by those IRA contribution limits, which I mentioned earlier about 7,500, you know, 8,600 if you’re 50 or or older. So, Loretta, good to hear from you. What is your fee for your service? We are a firsttime, no fee, no obligation service when it comes to assessing your situation and putting together a financial plan for you. If you decide to work with us with me as your financial adviser, depending again on your specific situation, there are feebased services that we offer management uh based uh you know because we are fiduciary here. We have feebased services that are are tiered based on your uh relationship with us or if you know we determine that uh you have u you know assets that don’t need to be managed by you know active you know management there are holdings that we have that have zero fees. So again, Loretta, it it just depends on on your um situation, you know, how comfortable are you with paying fees, the type of risk that you have, uh what’s your timeline when it comes to your uh investment objectives. Uh but otherwise to work with us directly um initially to put together this financial plan uh for you cost zero. That’s what you get as members of Alliant Credit Union. And I always like to say, you know, it’s uh it’s good not paying fees. Nancy has another question. Can you utilize ketchup contributions to Roth through your company contributions? No, this is only applicable to IAS. So, uh when it comes to 401k contributions, Nancy, it is bound by the uh maximum employee contribution limits within 401ks. Um and the total combined. So if your company matches right so you have your contribution then you have your employer the total contribution limit is 72,000. So um yes you are good in in terms of the uh contribution limits in terms of contributing more within that 401 uh K. Um, actually, you know what, Nancy, I retract. I was thinking, I don’t know what I was thinking. Ketchup limits within a 401k, $8,000. So, forgive me. Uh, you do have an $8,000 catch-up limit if you’re 59 uh 50 to 59. And then, not only that, you also have a if you’re age 60 to 63, you have an $11,000 uh 250 limit if your plan allows that. So, forgive me. There are catch-up contribution limits uh Nancy. So, ask your employer if if that if that is uh available to you in terms of the Roth because that might be a good way to go.
All right. Rapid fire today. I love it. Um, it really shows me that you you all are uh interested in in these type of Roth conversion um strategies, which is is phenomenal because I don’t know about you, at the end of the day, I’m not really a big fan of Uncle Sam taking my client’s money or my money. Uh, so if we can find ways to mitigate that, I’m all about it. So, uh, again, I truly appreciate all of your time. I love doing these things uh for for our members. Uh so please join us again for for other topics that we have uh just as you know a resource for you again. And if there are any questions that I haven’t answered or that you you come up with later, my information is on uh the slide up on the on the screen here. Please feel free to reach out to me. I’m located here in Chicago. Uh but I will reach out to anyone at any time uh if if you need me. Um, and again via phone, Zoom meeting, in person if you are in the Chicagoland area. Um, but again, I know your time is valuable and and again, thank you so much. Uh, have a great upcoming weekend here and uh, thanks again. We appreciate uh, your time and and what you uh, your business here at Alliant. Thank you folks. Oh, and for let’s see here.
Looks like there were a few questions that just trickled in if you’re still on these uh on this webinar. As a financial consultant, what is the rate that a client pays to Amber? I think I answered that it is zero initially and then we can determine how much uh you know if you are comfortable with our fee based uh strategies, how much those fees are. Helen, since conversion is due by 1231, how do we know what our tax bracket if income 1099s are not received until 131? Helen, great question. If you’re still here, uh, that is going to be determined again by your tax accountant or tax advisor. Uh, because, you know, as an adviser on my end, I can only view, you know, what you provide me in terms of, you know, how much, you know, I can I should convert based on what my tax advisor told me. So, if you know you’re going into um uh the new year, you know, that might be a little bit more difficult. Um but working with your tax advisor that they’ll determine how much you can convert hopefully by the end of of that tax year 1231.
Matt, what do the state planning coordination services entail? That again is part of our financial plan here. And forgive me if I am you are not on this call Matt I will reach out to you afterwards but if you’re still on our estate planning coordination services entail uh more you know trust accounts right um what type of accounts are going or need to have to be in in trust so we work closely with uh estate planning attorneys whether we provide them for you or if there’s something someone you’re working with uh we can coordinate with those uh trust estate trust attorneys is to determine, you know, what appropriate plan is there uh for you and and your estate. So, it’s a little more detailed, but it’s more of a team uh type of collaboration when it comes to estate planning. If I want to convert here in 2026, must I do it before 1231? Paul, the answer, yes. 1231’s the magic number. And unfortunately uh based on privacy uh rules and compliance I cannot send out the slide presentations. Uh but if you have questions Paul please feel free to contact me directly if any of you by that uh nature need any uh more information on what we talked about today.
Again for those of you on I appreciate the time and uh have a great rest of the week.