Okay, we’re going to go ahead and get started. My name is Kim Kennedy and with me today is Malcolm Horn and Malcolm’s going to be walking you through the Roth IRA conversion webinar today. Uh, but before we jump into that, just want to answer a couple questions. We get asked all the time if we actually work for the credit union, and we do. We work for Alliant Credit Union. We happen to be in the retirement and investment services division of Alliant. Malcolm and I are based in Denver. We have an office in the tech center and also over in Lakewood. We are happy to do virtual appointments if you’re joining from another state or if you are in Colorado and would prefer that would be fine as well. I’m seeing a lot of comments about a echo. I’ve seen a couple people that have joined twice. I don’t know if that’s the problem. I’m going to turn my mic down. Um, we will take all your questions at the end of the webinar today. So, please enter them in the Q&A or the chat box. You will get a follow-up communication from Malcolm or I just making sure your questions got answered and seeing if you need some help with your retirement planning efforts. We have a few webinars coming up to round out this month. The first one is
there we go. Thursday, July 23rd. We’re going to be talking about IRA planning, just all the different IRA types and how you utilize those in retirement. And then the next one, the following week on
there we go, Tuesday, July 28th, tax planning. just how your taxes change in retirement and we’ll go through all of that. And then lastly, we do have some resources available. Our website just has a ton of things on our events page. You can see the webinars not only that Malcolm and I are hosting, but what our colleagues are also hosting across the country. You are free to attend any of those that you’re interested in. We produce a in-house podcast and we store all those historical podcasts on our podcast page. So, if there’s a specific topic you’re wanting to get smart on, check that. It might be there. And then lastly, both our website and our blog just have a ton of financial information. So, again, if you’re trying to get smart on a specific topic, uh, go ahead and look there. And with that, I’m going to turn you over to Malcolm and he’s going to walk you through the webinar today. Thanks for joining. Thank you everyone. Um before we do get started, if you do hear a echo, you might be signed in twice. Um so just double check that. I don’t hear echo on my side, so I’m not sure exactly what’s going on. But anyways, let’s talk about today’s topic is we’re going to talk about Roth conversions. But before we jump into kind of Roth conversions, you might be asking, well, why are we talk why why are you doing webinars on Roth conversions? Well, one, we think Roth conversions can be a very important kind of strategy when it comes to a person’s financial situation, especially with kind of the environment that we’re in. And because if you think about this, let’s first talk about make sure we’re okay. Let’s first talk about the national debt. I pulled this number up last night. Currently, the US has $39 trillion. Think about that. $39 trillion in in debt. Well, just like anybody’s debt, how do we pay off debt? We either make more money to pay off our debt or we budget properly and save money and pay off our debt. So, if you think about the US national debt, if they’re going to increase their um if they’re going to try to pay down this debt, they’re going to increase their revenues, which is increasing taxes. But if you look over the last 5 years, they’ve been running a deficit. and a deficit. The simple way to think about this is if you make $50,000 but you spend $70,000, you’re in a $20,000 deficit. And you look at the US government and right now they’re in a 1.5 rough estimate deficit each year. So we are spending more than they’re collecting. And it’s projected that come 2031 that the revenues that they have coming in is just going to cover the um come 2031 the revenues are just going to cover the social security, Medicare, Medicaid and debt interest payments. Um snooze sorry I got a noticing my computer was going to be reset. Um sorry about that. So think about this. Come 2031, if all the revenue is coming in and just covering social security, Medicare, Medicaid, and debt interest payments, they have no other money to cover defense spending, infrastructure, or those other items that we rely on. Now, last year, there was this thought that in 2026 taxes were going to go up, but that did not occur. They came in and signed the one big beautiful bill act and they came in made some permanent changes. They came they kept the current tax hurts the same. They increased standard deduction. They eliminated some of the personal exemptions. They gave us a higher mortgage interest deduction. Um they also expanded some of the qualified business income deductions. And then they also put in some temporary changes. temporary changes for the senior bonus deduction, the salt deduction, car loan interest deduction, and you can see in this list. Now, when it comes to permanent changes, that just means there’s no expiration date on this. The temporary changes mean yes, there is an expiration date on that. So, just know the difference between these two. Now, come 2028 or 2032 or sometime down the road, they could change these permanent changes, but it has to be an act of Congress. So, again, as I mentioned, we thought taxes were going to go up, but they ended up staying the same for 26 and going forward. But if you look also at the top federal income tax rate yearbyear, you can see that you know back in the 70s the top marginal tax rate was 78%. Today is 37%. So you couldn’t make the argument that we are still in a low in low tax environment. And will that tax environment will they start taxing us more? Who knows? No one necessarily knows what’s going to happen down the road. But when you think about Roth conversions and thinking about we’re in a low tax environment, it might make sense to think think about this strategy. There’s a guy uh Ed Slot. He’s been talking about talking about taxes are going up, taxes are going up. He’s been talking about taxes going up for the last probably 15 20 years. And he’s been talking about doing Roth conversions all these years. And you can say, well, taxes have not gone up. His argument on the flip side of that is, well, look what the market has done over the last 20 years. So, another benefit of the Roth Roth IAS is the tax-free growth within that vehicle. So, think about it. 20 years ago, if you had that money invested in the market, 20 years ago, back in 2006, the S&P 500 was probably around a thousand. currently is trading almost at 70 a little bit over 7500. So that growth that you saw the last 20 years has been all now tax-free to you. So
let’s dig into Roth conversions and it’s you might hear about hey asset allocation have a little bit of money in each category of the market. Well, let’s talk about tax diversification, too. And think about these three different buckets. You have tax now, tax later, tax never. The things that are in the tax now bucket are if you’re invested in stocks, um, and you’re receiving a dividend or you sold a stock at a capital gain, you’re going to be paying taxes on that today. CDs, the interest you receive, you pay taxes on that when you receive that interest. tax later items are IRA, 401ks, or even non-deferred uh annuities. Basically, you’re saying, “Hey, I want the benefit today. I don’t want to pay taxes on it today, but at some point down the road, I’m going to have to pay taxes on it.” The tax never bucket is Roth IAS, MUN bonds, and HSAs, health savings accounts. These are buckets of money that will never be taxed. So again, when we’re talking about diversifying our investments, let’s diversifying our our money with these different buckets. So again, we’re here to talk about Roth IRA conversions, and that’s what we’re going to do today’s agenda. We’re going to talk about the basics of it. We’re going to talk about the original owner, IRA owner, the benefit of that benefit to that person, the benefit to a surviving spouse, and benefit to the beneficiaries when it comes to Roth conversions. So, let’s talk about the basics and then we’ll kind of progress over time. The basics, Roth IRA, what is it? The money you put in is not deductible. So you’re putting after tax money into it. The money grows tax deferred and as long as you’ve had that account for 5 years and you’re over $59 and a half, all earnings and interest come out taxfree. Now the contribution limit for this year is $8,600. If you’re over 50, if you’re under 50, it’s $7,500. There is no age limit. There used to be an age limit, but now that is no longer the case. Now, you have to have earned income to be able to contribute to a Roth IRA. So, if you’re 80 years old and you’re still working, still have earned income, you can contribute to a Roth IRA. Now, there are income limits, meaning that if you make a certain amount of income, you are not able to contribute to that. So, as a single filer, if your income is over $168,000 modified adjusted gross income and or and if you’re a married couple and or a married couple and your income is over $252,000, you are not able to contribute to a Roth IRA. But if you’re below the 153 and below the two $242,000, you are able to contribute to a Roth. Now, one thing that people do forget about is a spousal contribution. Spousal Roth IRA contribution. And that’s where, let’s say you’re a married couple. One spouse is already retired. The other spouse is still working. You come in and say, “Well, I can’t contribute to a Roth IRA because I don’t have any earned income.” But you are married to someone that has earned income. And if that’s the case, then you can still contribute to that Roth IRA. Now, you have you still have to meet the the income limitations, but if you’re below those income limitations, then you are able to contribute to a Roth IRA. Now, I’m not going to get into a a very much detail of this, but another way to put money into a Roth IRA if you are over those certain income limits is something called a backdoor Roth IRA. They at one point talked about closing this door, closing this loophole. They’ve never closed it. And what a backdoor Roth IRA is, if let’s say you you’re over those li income limits and you can’t traditionally put money into a Roth IRA, there’s something called the back door where you put money into a a traditional IRA. You don’t deduct it and then you turn around and convert it to a Roth IRA. Well, the money you put into the traditional IRA, you didn’t deduct. So when you convert that amount, you pay no taxes on it. But now all of a sudden, the contribution that you put into that traditional IRA and converted over to the Roth IRA is now sitting in the Roth IRA. Now the one thing to be watch out for, there’s this kind of gray area. It’s called a proa rule. If you do a backward or Roth IRA and you have other IAS, there’s this calculation the IRS requires you to do to determine you might still have to pay a little bit of taxes on that amount. But if you have if you’re a person that all of your money’s in the 401ks and you have no other IAS, a backdoor Roth IRA is very uh very efficient, very efficient. Okay. So, again, Roth conversions, it’s when you have money in a traditional IRA that usually is all pre-tax. You’ve kind of deducted that money and all that money is pre-tax. You move it over to a Roth IRA and the amount of money that you move over, you pay taxes on. So, the example Jill converts $100,000 in IRA to a Roth IRA. that $100,000 that she moved from her traditional IRA to the Roth IRA is now added to her taxable income. Depending on what her other taxable income is determines what her tax liability is on that $100,000.
Um, if a person is under 59 and a half and you do a Roth conversion, that 10% early withdrawal penalty is waved. So, be aware of that. So again, you do a conversion as long as you’ve had that account for 5 years, you’re over 59 and a half, all earnings and interest are going to come out tax-free. Now it’s 5 years and 59 1/2. So even if you’re let’s say you’re 61 61 years old and you decide, hey, I’m going to do a Roth conversion, you still have to wait 5 years for all earnings and interest to come out taxfree. So if you convert at 61, you have to wait till 66 for all earnings and interest to come out taxree. If you convert at age 50, you have to wait till 59 and a half to be able to take that money out all taxfree. So the time frame is a little bit longer. So again, it’s 59 and 5 years. 5 years and 59. Who can do Roth conversions? There’s no age limits. There’s no income limits. And there’s no requirement to work. At the end of the day, when you do a Roth conversion, the government collects taxes on that conversion. Now, they like collecting those taxes. Don’t get me wrong. They like collecting those taxes. And this could be one of the biggest mistakes that they ever make because 30 years down the road, you’re going to have these Roth IAS that are going to be massive. And the government’s not going to be able to tax any of that because they come in and said, “Hey, let’s collect the tax today on doing that Roth conversion. Fine, we’ll let them have that tax-free growth. We’re okay with it.” Now, something that I still bring up that was changed in the Tax Cuts and Jobs Act, um, was that there was a rule that had to do with Roth conversions. Prior to 2018, you used to be able to do you used to be able to do a Roth conversion and then decide later on to say, “Hey, I shouldn’t have done a Roth conversion and I just want to undo it.” And kind of treat it as it never happened. Well, the Tax Cuts and Jobs Act eliminated that your ability to do that. So now going forward whenever you do a Roth conversion it is done you that conversion is done you there is no redoss. So again just be aware that when you do a rough conversion even down the road if you’re like oh man I didn’t I didn’t plan taxes properly or whatever the case is market went down and you want to do it you can’t do it. The other benefit of Roth IAS is there’s no required minimum distributions. Meaning that you decide when you want to take money out. You can allow that money to grow taxree for the rest of your life. This money can also be passed on to your beneficiaries taxfree. So again, you have a lot of flexibility when it comes to Roth IAS and how you use that money versus traditional IAS. You’re required to take the money out at a certain point.
Also, with doing Roth conversions, it helps reduce the risk of raising rising taxes. Again, I don’t know what taxes are going to look like in 5 years, 10 years, 15 years, but if you’re a betting person, chances are taxes are probably going to go up. So, if you know what the current tax code is today and you’re comfortable with paying the taxes, it’s a hedge against rising rates and you’re paying today’s tax rate. But you can also manage yourself ma help manage reduce some of the tax liability on social security and Medicare Part B premiums. Let’s talk about that a little bit. Whenever you take money out of IAS, all of that money is going to be considered taxable. It’s included in your provisional income, which determines how much your social security is going to be subject to tax. It’s also included in your modified adjusted gross income for determining what your Medicare Part B and D premium is. When it comes to Roth IRA income, it’s not taxable. As long as you’ve had it for 5 years, you’re over 59 and a half. It’s not included in provisional income. It’s also not included in your modified adjusted gross income for Medicare pricing. So, if you think about it, if all of your money is in Roth IAS and you start creating income off of your Roth IAS, chances are you’re going to be very paying very little or none, no taxes on your social security benefits. So, again, it’s a huge benefit. Now, again, I’m not telling everybody go out and do Roth conversions. Me and Kim have definitely sat down with people and said it doesn’t make sense. It does not make sense to do Roth conversions. It just doesn’t. So, everybody’s situation is completely different. Now, I’ve talked about not necessarily knowing knowing what taxes are going to look like down the road, but we do have the ability to hypothetically kind of run a plan for your situation to understand what is your current tax create tax rate today and if taxes stayed the same, what does it look like? And this chart shows that this is someone that is going to retire at 70. So they have two more years of where they’re going to work. Their effective tax rate is in the 20s, but once they retire, they’re paying very little taxes. And when RMDs kick in, required minimum distributions kick in, their taxes increase. So, we do have the ability to kind of run this hypothetical about, hey, where are you at today regarding taxes and where could you possibly be down the road in regards to what your tax liability could look like? And again, there’s always these two tax perspectives when it comes to Roth conversions. You know, if you think you’re going to be in the same or higher tax bracket in retirement, you know, maybe Roth conversions make some sense. If you’re thinking you’re going to be in a lower tax rate in retirement, maybe it doesn’t make sense. So, you have to think about every moving piece when it comes to Roth conversions. What are your income taxes? What do you think your Medicare premiums are going to be? There’s something called a net investment income tax. If you’re a single person over $200,000 or if you’re a married couple with income over $250,000, there’s this additional tax called net investment income tax that basically taxes passive income, dividends, interest, rental income. So again, by doing some Roth conversions, maybe it helps you lower some of the tax liability you have down the road and reduces some of the net investment tax that you would be subject to.
Let’s talk a little bit about kind of brackets and how much income before you jump into the next tax bracket. So this is the tax bracket for someone that’s under the age of 65. Married filing jointly under the age of 65 and just uses this standard deduction. The first 32,200 is your standard deduction if you don’t itemize. That’s the amount of income that you can have and not have any tax subject to it. You can have an additional 24,000 almost $25,000 and be within a 10% bracket. So you could have a total of $57,000 and be in a 10% bracket. You can go all the way up to $133,000 and be in a 12%. and then you can go all the way up to 243,600 and still be in a 22% bracket until you go into a higher tax bracket. Now, one of the new changes that we saw a temporary change when it comes to the tax code is they added the senior bonus deduction. So, anybody over the age of 65, it’s a temporary deduction, expires at the end of 28. It says, “Hey, we’re going to give you an additional $6,000 per person for this additional senior bonus deduction.” Now, if you make over a certain amount of money, that that bonus deduction is completely phased out. So, as a single person, it’s 175. If you’re married, it’s over $250,000. So again, if you look at this, if you’re a per uh let’s see here, a single person below that $75,000 or no, this is a married couple. Sorry, married couple and you’re below the $150,000 and you’re over the age of 65. You get the standard deduction 32,200. You get over the age 65, another 3,300. You get the 6,000 times 2, so additional 12,000. So you can have a total of $47,500 of taxable income and not be subject to any taxes on that with this senior deduction. As a single person, it increases to 24,150. So again, going back to that example for married couple over the age of 65, if you’re just using the standard deduction with the senior bonus deduction, you you do not go into a higher tax bracket until you’re over 72,300. 12 148 and then as a 20 in a 22% or 148,300 in the 12%. Anything above that, you’re going into a 22. So why I bring those up is because when we talk about one of the strategies when doing Roth convergences, you can fill up a bucket. So going back to this example and let’s say let’s say hypothetically you’re earn $120,000 of taxable income. You have another $28,000 that you could convert and still be in a 12% bracket. And that’s something called filling up the bracket or filling up the bucket. when you do a conversion up to that top tax bracket. Now, one thing to be aware of, and that’s why in this last example, I didn’t show you a 22, is that as a married couple, when you go into a 22% tax bracket, you will see your PartB premium increase. Part B and D premium increase because of Irma. Irma is always a two-year look back. They’re looking at what your income was 2 years ago. And so if your income as a married couple and they look at modified adjusted gross income was 220 two years ago, your part B is $284. So again, when you’re looking at doing Roth conversions, not only do you look at the tax bracket, but you also need to look at the Irma bracket and understand, hey, if we do a conversion up to this amount, we could be paying higher part B and D premiums for Medicare. So again, it’s just something to be aware of kind of that side effect when doing Roth conversions. You also should look for a hunt for low income years to do bigger Roth conversions. Let’s say you retire at 65 and you’re going to delay social security to 70. Well, you have five years where you might be in a low tax bracket and maybe it makes sense to do Roth conversions in those years and pay lower taxes. Maybe you’re a business owner and you had a slow year. Maybe it’s a good year to do Roth conversions in those years. Um, maybe you have non-recurring medical bills that will help you reduce your taxable income. And this is a really good example like looking at is that right now when it comes to medical expenses, you can deduct over 7 12% of your adjusted gross income when it comes to medical expenses. So, let’s use an example of a mom. You know, let’s use an example. 80-year-old widow in a nursing home. It’s cost her $120,000 a year to to be in kind of a memory care facility. Her adjusted gross income is $60,000. She has 500,000 in IRA. She has $500,000 in a non-qualified account, investment account. So her income is $60,000. She’s able to deduct anything over 7.5% of her adjusted gross income. So her her medical expense deduction is $115,000500. So with that case, she pays no taxes. Now, if you came in and said, “Hey, let’s think about doing a Roth conversion. Let’s do $60,000 Roth conversion.” So her total income is $120,000. She she’s able to do a medical expense deduction and also take advantage of the enhanced standard deduction deduction. So, it’s a total of $117,000 that she’s able to deduct. So, her taxable income is $3,000. So, she pays $300 on taxes on basically almost $120,000 of income. So, again, with high nonrecurring medical expenses, it’s worth looking at that to help reduce your reduce your tax liability, but also do Roth conversions. she still has access to that money in that Roth IRA if she needs to use it at some point. But if she never needs to use this money, that passes on to the beneficiary taxree versus just letting the money sit in the IRA and becoming taxable, the beneficiary having to pay taxes on it. Okay, let’s talk about the IRA owner and the benefits of doing Roth conversions.
Now, as a IRA owner, you’re subject to required minimum distributions, meaning that at 73 or 75, you’re going to be required to take money out of your IAS. Now, depending on how much your accounts grow to, depending on how much you have to take out, the first year is around 3.77%.
If you don’t take that money out, the IRS could come in and say, “We’re going to penalize you 25% of whatever that amount was.” So, if your RMD was $10,000, they could come in and say, “Hey, since you did not take that out, we’re going to penalize you $2,500 for that.” Now, whenever you take money out, required minimum distributions out, it becomes taxable to you. Also, when it comes to RMDs, they do increase each year. Every year, that percentage increases because of a couple things. your life expectancy. The RMD is based on your life expectancy and what the account value was worth the prior year on December 31st. Every year you get a little bit older. So the IRS comes in and says you need to take a little bit more money out because you have a shorter life expectancy. So someone age 90 has to take out 8.2% of whatever the IRA balance is. Now, if you hypothetically at age 65 get a 5% rate of return on your IRA and you have a million dollars in your IRA, at age 73 when you’re required to take money out, that’s close to $56,000. A little bit over $56,000. At 83, it’s $85,000. At 93, it’s over $113,000 that you’re going to have to take out of that IRA. And that money is added to your taxable income. added to your modified adjusted gross income. So, it could put you into a higher tax bracket. Now, think about it this way. If if your 5% actually increases with inflation also and you’re getting more like 7 12% over that time frame, your R&Ds are even higher than what we’re estimating, which is possibly causing you to pay more taxes. So, Roth conversions might help you reduce what you’re going to be required to take out of those IAS.
So, again, could be a viable strategy when it comes to using Roth IAS to help you reduce your RMDs to help you reduce your taxable income down the road. Here’s an example of Bob and Mary. met with Bob and Mary and based on the social security and their pensions they’re receiving that they’re not even spending all of that money and they’re we’re just living on social security and the pensions we receive. But at 73 which is this dark orange that shows them what they’re required to take out. And it’s amazing how many people actually don’t know what their RMD is going to look like. And when you plug this in and run this analysis and look at this, it’s coming in and saying, “Yeah, you basically pay no taxes at all because social security is very tax efficient. Um, social security is tax efficient, but when you when you turn on RMDs, your tax liability increases.” So he said, “Okay, let’s consider something. Let’s do a Roth conversion for the next 8 years. Let’s just look at $60,000 and see if there’s any benefit in doing so. Yes, their taxes increase in those eight years that we’re doing these Roth conversions, but all which is the red, but all the gray represents the reduction in taxes they see. So, when you look at this and say, “Hey, what was the benefit of me doing those Roth conversions?” Well, over your lifetime, you save over 140 about $141,000. That’s $141,000 that you are not giving to the IRS. You are keeping within your portfolio and increasing your net worth.
All right, let’s move on to surviving spouse. When it comes to surviving spouse, you know, again, I’m focusing on a married couple. If you’re a married couple and you let’s use an example, married couple, you’re you have pension and IRA distributions of $58,000. Both of you receiving social security of $32,000 each. Your after tax income after taxable after paying tax is about $115,000. So you’re in a 12% marginal tax bracket and you pay a little bit over $7,000 in taxes. the as a married couple the reality of it is at what at some point in time one of you is going to pass away and when that occurs you that person now will have to file a single tax. So now look at that situation. When one spouse passes away, if we want to keep the same amount of income, $115,000 coming in, that means that we need to take more out of IAS to satisfy your your your income goal. You lose a social security benefit and your in your taxes increase by 152 thou 152%. So now you’re in a 24% marginal tax bracket. And this is this is the reality. You know, again, I don’t know what the probability of a married couple passing away at the exact same time, but what I’ve seen even with like my mom or my wife’s mother is the husband passed away first and now suddenly they’re filing taxes as a single verse married filing jointly. This is a reality. Even if we saw taxes stay the same, your taxes will increase if you’re a married couple and one spouse passes away.
This is an interesting chart just to show you is it’s a compression of taxes, a compression of the tax brackets. So, as a married couple married filing jointly, if your income is around $200,000, you’re in a 22% tax bracket. But if you’re in the $200,000 with filing single, you’re actually in a 32% tax bracket. So you can see the compression of the tax brackets going from married to filing single. This is a great example. If if someone’s, like I said, in the $250,000 range as a married filing jointly, you’re in a 24% marginal tax bracket. But if you keep that same, you know, 200, we we’ll use the 300,000. 300,000 300,000 you’re in a 35%. So 300 as a married filing jointly, you’re in 24%. 300 as a single person, you’re in a 35% tax bracket.
Let’s move on to beneficiaries. So there we used to have the ability to stretch IAS, meaning if you’re a non-spouse, you inherited IRA, you had the ability to stretch that IRA out over your life expectancy. So in this case, Carrie um inherits a million dollar IRA. She has $90,000 of uh earned income. And in the old rules, she would just add $25,000 to her taxable income cuz she’s going to stretch that over her life expectancy. Well, now with the new rules, she has to take that money out over a 10-year period. So, if you spread that out over a 10-year period, she has to take $123,000 out each year to make sure by the 10th year that inherited IRA is completely liquidated. So, you can see like at 90,000 if you add 23,000 to it, like yeah, she’s in a 24%. But now with the 10-year rule, adding $123,000 puts her puts some of her income at a 32% rate.
So, let’s think about an example. Mom and dad, they have a son. uh they have a IRA that’s 250 $255,000 in it and they’re going to convert $50,000 over the next 5 years and they’re using a 7% rate of return. Mom and dad are in a 12% bracket, the son’s in a 24% bracket. So ultimately, you just look into this face level, you know, it probably makes sense for the parents to pay the taxes on it because when the son inherits it, there he’s going to have to pay a lot more taxes than they would. So when you look at this and say the green line is the owner. So if the owner passes away and the son inherits it after paying taxes, they’re going to get much less. But if you come in and say hey let’s convert it which is the owner which is a yellow line and then the blue line is the beneficiary if the dad passes away what they would receive. So you can see like over time in year 15 that with doing the Roth conversions upfront that in year 15 when they pass away the son gets the exact same amount and it’s all going to them tax-free. Now, so there’s $56,000 benefits in year 10 and over 110,000 benefits in year 20. Now, the mom and dad still has the ability to use that Roth IRA if they needed to. So, it’s not that they’re not reducing liquidity for themselves, but they’re coming in and saying, “Hey, this is this makes a lot of sense to pass this money on to the son tax-free so he doesn’t pay have to pay the higher taxes.”
Okay. Some considerations when it comes to Roth IAS. There’s no income limits. The amount you convert is added to your it’s taxable at ordinary income tax rates. the deadline to do it is September 31st to be added in that year’s taxable income. So if your intention was, hey, in 26 I want to do a conversion, but you don’t get around to doing it until March of next year. Well, March of next year, it’s going to be taxable in 27. It’s not like the contribution limits, contribution rules. contribution rule says that hey you have up to April of next year to make a contribution to the IRA and count it for 26. That’s not the case when it comes to conversions. If you want that money to be added to your to the yearly taxable income, you need to do it within that year. There is no pre-age 59 and a half additional tax for doing conversions if you’re below 59 and a half. Uh and just be aware of unintended consequences when it comes to Roth conversions. you know, maybe you pay more taxes on social security over or your Medicare premiums increase. And of course, there’s no guarantees that the Roth conversions will meet your objective. Now, let’s use an example of Richard and Deborah. And this is some of the planning that Kim and I do. So, Richard and Deborah came in. Uh they’re going to retire in the next year. Richard said has some health problems. So, you know, we’re using a life expectancy of 85 for him. Deborah’s going to have a long life expectancy. We’re using 95 for her. They have assets, you know, 401ks. The house is completely paid off and they have money in savings. They they have income in last year of income is around 300,000. So, they can’t contribute to a Roth IRA. This is their social security amounts. We plugged that in. Richard used to work for United, so he’s going to be collecting PBGC um amount. They want to live on $5,000 a month in retirement. We need to take into account the cost of health insurance and they’re going to do some travel and we’re looking at federal and state taxes for their situation. They are maxing out their 401ks and could receiving a match. So once we put these pieces together for them, we have a clear idea of what their cash flow looks like, you know, yeah, the first year they’re working, so it covers all their expenses. The next year, social security, the pension, and they have to take a little bit of money out. So social security is the dark blue, the teal is the pension, and the yellow is like they’re taking a little bit of money out to cover their total expenses. The dark red is required minimum distribution. So you see anything above that red line is excess income that they’re just excess income that they’re reinvesting. And even when Richard passes away, we lose the social security, but based on the RMD that’s coming in, we’re still able to replace Deborah’s income throughout retirement up to age 95. Their assets continue growing and that’s what they want. They want to grow their assets and pass it on to beneficiaries. So we said okay let’s let’s let’s consider Roth conversions for the next 3 years and stay within a 12% bracket. By doing so we get a general idea of like how much we can convert and get a sense of what is the benefit if we wanted to stay within a 12% bracket. So by staying within a 12% bracket we’re actually saving over $100,000 in taxes. That again, that means that’s $100,000 that you’re not giving the IRS for them to spend any way they want. It’s money you actually get to keep and increase your net worth, which was one of their goals. Yes, the red is additional taxes that they have to pay, but that 100,000 is taking that into consideration, but all the gray is the reduction taxes that they’re not going to have to pay because by doing Roth conversions, we’re reducing what they’re going to be required to take out.
So, you know, in conclusion, and again, kind of going back to this, this is some of the planning that Kim and I do when we work with our members of the credit union to give them a full comprehensive plan to say, “Hey, yeah, you don’t have any concern about running out of money.” Great. But let me show you the amount of taxes that you’re going to have to pay if you don’t watch out for certain things when it comes to in the future. Our accountants will always look backwards and say, “Hey, I’m going to do your taxes and we’re going to look backwards.” We want to look forward and say, “Hey, how do we reduce your tax liability?” So, we don’t know what the taxes environment is going to look like in the future. Chances are taxes are going to go up. So, Roth conversions can be a ve very effective tax tool diversifying tax allocations. They’re not subject to RMDs. A very taxefficient way to leave money to hairs. Um, so it is a Roth conversion is a very important consideration when it comes to retirement strategies. So ultimately we’re here to help. We are part of the retirement investment services division. We do comprehensive planning and we’re able to answer a lot of the financial questions you have in regards to like, hey, should I do Roth conversions? What’s the best way to create income? Should I spend IRA money instead of delaying should I spend IRA money and delay social security? to a later point. What is the best way to pass money on to beneficiaries? So, there’s a lot that we can help you with when it comes to your financial situation.
The other thing I want to mention, this is something new for clients that are part of the retirement investment services division. Um, we do have the ability to help you get your estate planning done at no cost. And that basically is a will, trust, power of attorney, living will, HIPPA, authorization. We have tools where it’s an online tool. You go in, plug in all the information you want in regards to who’s going to be your POA, what do you want to happen if something happens to you. This is something that we are offering to our uh clients that are part of the part of the retirement investment services division of the credit union. Okay, with that I’m going to open it up for questions. I am going to post a poll out there. So, the poll is just saying, hey, if you’d like to schedule a meeting for with one of us, um, please indicate that. We’ll reach out to you, put something on the calendar to help you kind of help you with going down the financial planning process. Uh, with that, um, we do have some questions. Questions. Let me just get through all the echo comments. Is it better to do a backdoor IRA the year you retire or later if you’re a high income earner?
So when doing the backdoor IRA, you still need to have earned income. So, if you’re a high earnner, um I guess it’s just a the backdoor IRA is just a way to put money into the Roth. So, it doesn’t really matter when you do it as long as you have earned income that allows you to do it. I don’t Yeah. Would you add anything to that, Kim? No. Well, I mean, if your goal is to get money in the Roth after you retire, you could do a conversion and maybe get to do more than just the backdoor Roth that would be limited to the contribution amount. Um, does the amount we take out of the traditional IRA become part of your AGI for eligibility?
Repeat that question. Does the amount that we take out of a traditional IRA become part of our AGI? And then it says for eligibility.
So yeah, so whenever you take money out of your IRA and if it’s all pre-tax, it’s going to be part of your adjusted gross income. I think she says meaning the max amount contributing for a Roth. So yeah, when you’re pulling out of your traditional and going to the Roth, that’s a conversion, not a contribution. Mhm. I’m not sure. Um, also, should you do a lump sum or an amount I think I will need five years down the road?
A lump sum for what? I’m sure a Roth conversion, if they’re talking about five years down the road, I would assume. Yeah. I mean, when it comes to Roth conversions, it’s just a matter of how much are you willing to pay taxes on? I mean, that’s I think that’s really when it comes down to it. I mean, I could show you the the best best Roth conversion strategy ever. But the biggest hang-up that we see is people writing the check to the IRS. When I come and tell you, you need to write a check for $45,000 to the IRS, people say, “Oh, I don’t want to do that.” In my career, I’ve had one client that had a child, one child, and they didn’t really need the money and they just wanted to convert the IRA for their kid and she moved a half a million bucks and paid tax on it. But that is the exception for sure. Yeah. Um, and kind of on that, she asked, “If I make a h 100,000 and I take out a hundred, is that too much to open a Roth?” Again, there’s not it’s all about how much you’re willing to pay tax on. So, if you can do it, do it right. If it makes sense. What is the process and cost of joining Alliant Retirement and Investment Services? What is the process and cost? Yeah. So, let’s talk about the process. Um, Kim and I always start with the plan first. And our first initial meeting is gathering information. We would send you an email giving you a list of questions to kind of think about and a list of things to gather so that our first meeting is very productive. We’re asking a lot of questions when it comes to your situation, getting all the information that we need to build a comprehensive plan. Then we would review that plan with you and show you what’s good, what’s bad, how do we improve, what are things that we need to watch out for. And then at that point, we’re going to decide, hey, do you want to hear recommendations or not? Up to that point, there is no cost in doing any of that. But if you decide, hey, yes, I do want to hear recommendations, see what you have for me, we would talk about recommendations and the cost associated with it, implementing that based on the planning that we’ve done for you. And so, everybody’s situation is completely different and everybody’s situation is a little bit different in regards to what they want to accomplish. But it it’s it’s a person byperson situation when it comes to, you know, what is the cost and what’s the recommendations. It it just varies. And the word recommendation means we’re putting together an investment proposal to show you how if you had your money with us, how we would invest it and how we would invest it differently than what you’re currently doing for a couple reasons, right? Do you need better diversification? Do you need less risk? Do you need more income? you know, all those things come into play and then we would uh make the case for why we selected the investment we selected and talk about, you know, fees associated if there are fees. And then at that point, you say, “Yeah, Kim, or Malcolm, we want to work with you.” Or, “Thanks, but no thanks.” Or, “We like this piece, but not that piece.” Or, “We’re willing to do this portion, but not the whole the whole farm.” So, that’s kind of how the process works. Um, next question. Your example for Richard and Deborah showed they made 300,000 in income and you said they were not eligible for Roths, but your recommendation was to do Roth conversions over the next few years. Thought you said they were not eligible since they made 300. Please clarify. Yeah. So the 300 since they were over 300, they weren’t able to contribute to Roth IAS. But based on doing Roth conversions, anybody can do Roth conversions and there’s no income limit to do Roth conversions. So when I mentioned that it was had to do with making contribution to Roth IAS, two sets of rules. Yeah. Roth contribution rules are different than Roth conversion rules. Okay, let me get to this page. Uh did you say an inherited IRA is taxable? So when you inherit a traditional IRA, majority of the time that money is all pre-tax. So when you start taking the money out, you do have to pay taxes on it. If you inherit an if you inherit a Roth IRA, then there is no tax liability because it’s a Roth IRA. Uh, somebody’s asking if this webinar is recorded and no, we don’t record, but we do have about six or seven topics that we run through. So, we will do Roth conversions again. Just watch your emails and you can sign up again. Uh, I have a question about the five-year rule on conversions. If I’m over 59 and a half years and have held original Roth accounts more than five years and I’ve made several conversions since the five years, does each conversion have its own five-year waiting period? Yeah, you’re over 59 and a half. So that fiveyear waiting period is it throw it out the window. It it doesn’t apply anymore. Um as long as you’ve had that Roth IRA for five over five years, then you know all earnings and interest come out taxree. Now now think about this. Think about this. If you put money in, let’s say you started the Roth IRA in 2021, so 2026 is now here. you’re you’re 5 years in. So earn all earnings and interest come out taxree. The money that you put in like last year, there’s probably not much earnings on it. It’s just one year of earnings. So, you know, again, the 5-year rule doesn’t come to play because you it all it’s all based on when you started that Roth. It’s not a rolling it’s not a rolling period. Fiveyear period. Yeah. If you’re 59 and a half, that rolling thing goes away. One Roth IRA open at least five years. Any conversions you do after that, whether you drop it in that Roth or not, same thing. No fiveyear. Okay, next question. Um, I’m 46. I’m converting a million dollars from a traditional 401k to an IRA to have wider investment options. Not really a conversion, that’s a rollover. From here, my plan was to start a Roth 401k from now until retirement. Um, upon retirement, is it best to withdraw from the IRA before the Roth? What’s the best strategy for withdrawals? Yeah, we need to run your plan to tell you that we, you know, a lot of that’s going to depend on your expenses and your tax liability. Uh, general wisdom is people spend the Roths last, right? That’s nice to have a bucket of money that’s taxfree. somewhere down the road you want to buy a car and you don’t want to increase your taxes, you pull it out of there. Uh but we our software can we can run it and and actually optimize which type of money you should spend first. Um next question. What if you have a stock account? What if you have stock accounts called Roth IRA? I’m not sure what the question is. Yes, you can have a Roth IRA and have whatever you want in it. It could be stocks. It could be bonds. It could be mutual funds. whatever stock accounts called Roth IRA. Not sure what that question is. Um, can you withdraw from your Roth the basis, not the income within the first 5 years over 59 and a half? Yeah. The cool thing about Roth IRA is it’s first in first out. So, if you think about it, if you’ve contributed to a Roth IRA, let’s say, you know, you’re 25 years old and you contribute to a Roth IRA uh for a couple years and you need that money for to help purchase a house. Well, you could take your contributions out. It’s because you’ve put it’s after tax money you’ve put into it. It’s the earnings and interest that would be subject to tax liability if you’ve had not if you hadn’t if you don’t have that account for 5 years or 59 and a half. So yeah, first in first out what your contributions that you put in can be taken out any time and not have any tax liability. Same is true for the converted dollars.
Go ahead. Never mind. I’ll just go to the next question. Are the rules the same for 401k conversions to Roth 401ks?
Are the rules the same for Yeah. Yeah. There’s the the rules are the same. Check with your plan. I mean, sometimes the plans have different rules and don’t allow it, but in terms of taxation and such, it’s all the same. Uh, I’ve been retired for a year now. Most of my money is in tax deferred 401ks. Do you handle this situation? We sure do. Yep. Sure do. Uh what are the fees for recommendations dur discussing Roth conversions and what would be appropriate in our situation? Yeah, we don’t char So right now and the way the credit union you know again we’re part of a line credit union. We’re employed by a line credit union. We’re a nonprofit. We do not charge financial planning fees to help people with their financial situation. Could we? I mean, I guess we could, but I mean, a current CEO wants to provide additional value to members of the credit union. So, we we don’t charge Yeah. We don’t financial. We don’t. But clearly our hope is is as we go through this planning process and model these Roth conversions and investment strategies and different things is that you know you think you you think you can get a sense that we have an idea of what we’re talking about and maybe we could be the ones to help you do the investments for your monies as well. Uh,
it is easy to wonder at 3:00 a.m. while I’m lying awake, oh man, I wonder if I if I had just not done a Roth conversion, would I have more money? Now, can you speak to the situations in which this worry would be valid?
I mean, at the end of the day, we tell people all the time, I mean, not all the time, but we do tell people it doesn’t make sense to do Roth conversions. So, it there has to be a a benefit for us to come in and and tell someone to do Roth conversions or not. I mean, at the end of the day, you still need to do the Roth conversion. You’re still the one paying the taxes on it, but there’s no benefit for us to come in and be like, “Hey, there’s no benefit, but I’m going to recommend you do it.” Like, there’s no we’re going to come in. We we hold ourselves to a fiduciary responsibility to do what’s best for the client. That’s our our main objective. And if Roth conversions make sense, we’re going to talk about it. It’s going to be up to you if you want to do it or not. I think I think where that question, you know, how I might answer that is, you know, if you did, let’s say you did a Roth conversion now, you know, and you paid taxes, let’s just say 100 grand, and then the market tanked, right? Clearly, it would have been what better to do the Roth conversion when the market tanked and you were paying tax on 70 grand instead of 100. But, you know, that’s just a risk that you have to take because there’s no way to undo that. There used to be, but there they took that rule away. Uh, there’s a couple more. Let me go back over here. Are you 100% fee only fiduciary planners? Do you act in the client’s best interest? I think Malcolm asked that, answered that already. Do you make any commissions off any of the recommendations you might offer? So, we’re not 100% fee only. We do have investments that uh do pay a commission to us. They generally don’t come out of your investment money. Uh but it really just depends on what’s appropriate for your situation. You may be in a situation where everything you have should be in just 100% fee only and some people may not. kind of depends on risk and liquidity and what you’re trying to do. More and more we get people that are close to retirement and they they’re less worried about making a 20% return and more worried about keeping what they’ve accumulated. Uh is there a max amount for conversions?
Just the amount you’re willing to pay. Yeah, write that check to Uncle Sam. Uh, do your what if calculations include Medicare increases and if going into the next tax bracket makes sense dollar-wise? We we have um run so our software doesn’t necessarily like automatically um increase the Medicare premium once you go into a higher tax bracket. But we when we look at the planning and we look at this, we do take that into consideration based on the taxable income that we see down the road. So that is something that we do look at when we do these plans for members. Yeah, we we just add an extra expense for Irma. Uh but to about the next tax bracket and if it makes sense, absolutely you can compare one scenario to another scenario and compare tax brackets. you can see how much more or less you’d pay cumulatively in taxes and what the impact is on your overall portfolio over time. Um, one more question. When you have medical expenses of 120K, you mentioned for memory care, does that 120 lower your AGI by almost 120 or does it lower it by much less? For this example, let’s say your AGI as a married couple is 275. So that 7 12% medical expense you the first thing you do is you take your 275,000 of your adjusted gross income and multiply that by 7.5%. That’s going to give you 20,625. So everything above that you’re able to itemize. So, if your memory care is $120,000 minus the 20,625,
that means you’re able to do a itemized deduction of $99,375.
So again, it’s 7 12%. Anything above 7.5% of your adjusted gross income is what you’re able to itemize. So in this case, if your your adjusted gross income was 275, you’re able to deduct 99. So it’s going to drop your taxable income now down to 175,000. So it’s not a dollar fordoll reduction. Still good though if you’re paying, right? Okay. Uh I am currently 63 years old and retired with a pension of 74K a year. I work part-time, pushing my total income to about 160. I want to start converting money in my IRA to my Roth. Should I stop working part-time so I can do bigger Roth conversions? And I want to limit my income to avoid Irma li and limit my income to avoid Irma limits. The first question I would ask is, do you like your your part-time job? I mean, I’m not going to tell anybody to quit their part-time job to do with bigger Roth conversions. I mean, if you there might be a reason why you’re working part-time. Maybe you like it. Maybe you like being active. I mean, that you’re the only one that’s going to be able to answer that. Um, so, but I mean, we can run multiple situations and say if you worked if you continue working part-time, this is what it looks like. If you stop working part-time, this is what it looks like. So, I mean, we can run through different scenarios for you. And I’d add one thing about the Irma, right? I mean, we hear all the time people just want to avoid Irma to the nth degree. I mean, if you didn’t do any Roth conversions, you’re not going to hit Irma till you’re RMDH, right? And maybe you got a big RMD and your Irma jumps up multiple multiple steps. But sometimes, you know, paying Irma for a year to convert a big chunk of money might be worth it, right? Because whatever Medicare uses, it’s one year. I mean, it’s a two-year lag, but you’re only using that for one year. So, sometimes people don’t want to do Roth conversions because they want to avoid Irma. Well, they’re not going to avoid it anyway by the time they get to RMDs. So, it may be better to hit take the Irma hit one year for a big conversion to lower your RMDs for the long haul, if that makes sense. But, okay, I think we have everybody’s questions. Awesome. Great questions everybody. Thanks for sticking around and asking those and we look forward to talking to you soon. Malcolm, anything else you want to add? No, that’s it. Okay. Appreciate it. Thanks everybody. Enjoy the rest of your day.