Hi everyone, this is Mike. Uh just wanted to say thanks for uh logging in and joining me on the web webinar. We still have it looks like about seven or eight minutes. So just letting you know you’re in the right place and I’ll I’ll be back uh in a few minutes. Thank you again. Evening everyone. Uh, looks like we still have a couple of minutes and it looks like we’re still having folks join. Hope everyone’s having a good evening.
I’m not sure what part of the country you’re joining me from, but wherever it is, I’m hoping it’s cooler than it is here in Houston, Texas,
which it feels like it’s about 200° and uh about 10,000% humidity.
Oh, Tampa, I don’t think your weather’s any better in Miami. At least you have a much nicer beast beach than we do here in uh in Houston. Your uh your water color is the correct color.
If anyone’s ever been to Houston or Galveistston since we have still a couple of minutes, so when I first moved here a million years ago, like hey, I’m going to go down to Galveston Bay, which is, you know, about an hour away from where I’m at. I’m like, it’s going to be the Gulf and it’s going to be amazing. My family’s originally from Hawaii and I grew up in Southern California, but I’ve been here a very long time. Everyone goes, it’s not it might not be what you expect when you’re thinking the Gulf. And I’m like, really? So I go down there and if you’ve never been, Galveastston is on the west side of the Mississippi River. So the tides, so the the the tides actually bring the silt of the Mississippi. So, our Gulf Beach is not clear water. It is a silty brown water. Uh, but occasionally we get a storm that comes in and shifts the tide and then for a day or two we have like out of a postcard crystal clear water. But it is a rare sight to see. So, yeah, Miami Beach, you definitely have us beat in about a million ways in that respect. Um, all right. I have six o’clock straight up. Looks like some folks are still joining. I’m going to give it maybe one more minute and then we’re going to start. Um, kind of in the interest of time. We want to leave plenty of time for questions at the end. So, um, I think we’re going to go ahead and start. So officially, welcome to Roth IRA Convergence. Uh I appreciate you joining me this evening. If you’re joining for the first time, uh extra special welcome. I’m Michael Marx, certified financial planner and financial consultant with Alliant Retirement and Investment Services, or Aerys for short, A R I S. I live here, as I said earlier, uh right here in Houston, Texas, and I’ve been doing this for I don’t know over 30 years now. Uh so my family’s been tied to Alliant. I tell this story every time. I’ they’ve been tied to Alliant longer than I’ve been alive. So most of my family has worked for either United or Continental since the 1960s. And if you didn’t know, Alliant was originally United Airlines Credit Union before we changed our name. Um and they’ve been around for over 90 years. So, um, I realize you may have found us through different channels. So, whether you’re joining us from United or Continental or Alphabet/Google or Tesla, CVS, Susie Orman, welcome everyone. I’m glad you’re here.
Before I can get the slide to change, before we dive in, I want to share a quick housekeeping item. Today’s session is for educational purposes and includes proprietary materials. So to protect both the content and everyone’s privacy, we ask that attendees please do not record or capture the presentation whether that be by video, audio, screen sharing, AI tools without any prior consent. Thank you so much for your cooperation and understanding. So with that um again if this is your first webinar or your 10th webinar you would know this but we offer multiple webinars on various topics throughout the week with different presenters. Uh you can find a list of the upcoming webinar uh on our website. So that would be a creditcredit.comvents and we actually have a wealth of information there right. So, I encourage you to take a look. You’ll see our our InvestSavvy podcast. We have our blogs. Uh, and you can find that through our website directly or you can just find this on the Alliant Credit Union homepage, the website there and in the upper right hand corner there is a tab that says retire and invest and that is us.
So, we normally do two a month. We have different presenters. I try to do one in the evening such as this and then one in the afternoon. So, my next webinar will be in the afternoon and that’ll be Wednesday, July 15th. Um, that is 2:00 p.m. Central, 3:00 p.m. Eastern. Uh, and it’s trusts just aren’t for millionaires. Uh, so it’s about some uh higher level estate planning. We’ll go over trusts, wills, the importance of POA documents, etc. It’s some of the fundamental estate management. Um the one after that, I’ll be back in the evening. So, we’ll be planning for long-term care as a family. That is at the end of July. So, it’ll be July 28th on a Tuesday, such as this at 6:00 Central, 700 p.m. Eastern. And and frankly, so I do think long-term care. So, our primary focus and our primary line of business is actually wealth management. We handle investments. the webinars and things are just something that we do as kind of a I don’t know a courtesy, right? Uh it’s a service for our members here. But I will tell you in the world of things that could happen to to derail a retirement plan, it’s really something happening in the realm of, you know, where you would need long-term care and might not have it or something. So, we’ve seen this happen. you know, everyone usually knows somebody, a family member or a friend of a family member or a friend that that their health deteriorated and they they went into that, but it’s it’s a good high level if you haven’t or if you’re not familiar with it. Um, so and I’m not sure if you joined us via web via email directly from us or if you signed up on the credit union’s website. So I just want to take a few minutes and talk about ARIS uh because in addition to the weekly webinars that we host we are a fullervice wealth management division of the credit union um and investment planning. So we’re financial planners, we’re fiduciaries and we have a broad range of the investment options out there from everything from fixed rate guaranteed to as aggressive as you want to be. Uh, as you can see, the estate planning, we’ll talk about that later, that we added some of the things like um like trusts, basic trusts, basic wills, power of attorney, things like that. We’ve had enough people asking about that. Uh, so let’s start. So, with the future of the tax environment and how budget deficits and titlements and taxation can affect Roths and why they might be something that you want to consider. So this our current national debt, right? So that’s 36 trillion with a T.
Hopefully it gets smaller, but we’ll see. Um, so obviously the other thing too is our budget def deficits have been increasing, right? So it dipped a little bit. So So if you look at that big dip, I’m hoping you can see my cursor here. Right here. So this is right around 2020 with COVID, right? So all of a sudden we go from trillion to what you see happen virtually overnight, right? And that’s 2021. So the deficit spikes up and so far it hasn’t really come back down. It’s come back some. Um so maintaining that debt right when interest rates are low are one thing. However, the carrying costs become more of a burden as the new treasuries are issued at higher interest rates and the older debt at lower interest rates are retired or mature. So, we’re going to take this just to kind of give you an idea. We’re going to take this from a perspective on the case that even though we don’t know where taxes are going, there’s probably going to be a good case that down the road taxes will be higher. But to skip to the punch line, I’ll give you a little bit on that is even if they aren’t, there’s still a reason to consider doing conversions as part of your retirement strategy. And and I’ll go over the other reasons why. So let’s let’s take a look at at how this affects entitlements, right? You have social security, you have Medicare, you have Medicaid, as well as the interest payments on those current debts, right? So that consumes all of the tax revenue that you have coming in. So according to the CBO, which is the Congressional Budget Office, this is going to happen in 2035, right? Where where you’re crossing that line, social security, you run out and it’s a concern. So and that leaves kind of nothing else. So like your health and human services, highways, defense, and all those other things. So if you’re the government, there’s really only two ways that you can counteract that problem, right? Number one, you can cut spending. Now, one of the ways to cut spending is just be more to be smarter and a better steward of how we spend, right? There’s there’s so many things and laws and lobbyists and things like that that that we could change that would save the government some money. So and there is a lot of overlap and there is a lot of bloat in the government when you look at it you know from a hundred years ago not the size of it but the percentage of the government versus the size of the economy. You would expect the government to grow but unfortunately the pace at which it had grown kind of lends to some of the bureaucracy at this point. So with that said so you can either cut spending or increase taxes. So, and maybe the answer is somewhere in between, but what we’re more likely to see is taxes being raised. Now, the belief is somewhere and the talk out there on Capitol Hill is that they’re going to target households of 400,000 and up. The reality though is that the expectation is that we’ll probably trickle down to some of the lower income households, right? Not necessarily low income, but lower. One of the things that they can do, and we’ll talk about this a little bit later, is even if they keep the tax brackets the same, they might expand the brackets where if you made a certain level of income, you would normally be in the 12%. But now with that same level of income, you’re in the 22. So they didn’t change the tax bracket, but your tax your taxes could be increased. So we do expect at some point even though if they focus on the higher income earners you know not necessarily the millionaires the billionaires or now the trillionaire um but we really see this kind of impacting some of the middle and middle high income people we expect them to start feeling the income or impact now with that said right so we talk about tax rates throughout history so historically and if you go back you know to the early teens 1913 you’ll see that the t highest tax bracket was high 70 77 78%. Now, what we generally did, right, we raised income taxes. That would be World War I. And then it came down and then it went back up when we look through the depression, right? We had the crash, we had the depression, they needed to raise revenue where they could. Um, and then we didn’t come back down until well after World War II. So you started going into the 70s, we had inflationary periods and then we kind of settled down and stabilized into the early mid 80s. Um, and then we kind of go from there. So based on that chart alone, we say, well, when you’re looking at deficits, and I know they’re talking about people paying taxes, you have one side saying, hey, we want to cut taxes and one side that we need to raise taxes. Again, you have income, you have outflow. We don’t know where it’s going to be for sure, but if we’re betting, we see an increase. So, um, so there’s a couple of ways taxation can be diversified, right? So, it’s a tax now, tax later or tax never. So, the tax now or just like your current brokerage accounts where you have index funds or you hold individual stocks or your savings accounts or CDs where you’re getting that $1099 every year on the interest earned. So, some of the tax later things are tax deferred as we would know them. That would be things like your IAS, um your 401ks, any annuities that you may have. And what that does is it says, “Hey, look, as I’m earning interest on this, nothing. I’m not getting any 1099s, but when I take money out later, I’ll pay taxes off and recognize that on my uh on my income taxes for that year.” And then we have the tax never, right? And those are things like your Roth IAS, which is kind of what we’re talking about as far as Roth conversions, the municipal bonds, and your health savings accounts, your HSAs. So, those are a few different ways that we can do this. So, this is going to be our agenda for today, right? We’re going to talk a little bit about the Roth conversion, what’s behind it, uh consideration for the original owner of the Roth IRA or the surviving spouse, um and then beneficiaries, and we’ll talk a little bit about some of those impacts. So, let’s get started with the basics, right? So, you probably know that there’s another type of IRA called the Roth IRA. So, Roths are similar traditional IAS in many ways, but there’s some key differences. And frankly, it’s one key difference. So, you don’t get the tax deduction when you make a Roth contribution. And there’s many people who make IRA contributions, traditional IRA contributions, that they make too much money that they do not get that deduction anyway. So, but here’s the thing though. Once your money goes into that IRA, a Roth IRA, it grows tax deferred, right? So, there’s no there’s no 1099s, but once you take it out, it’s taxfree. So, that is the biggest difference right there. Um, so now you’ve had to have you’ve had to have an A- Roth, not just a particular Roth, but your your your Roth will have to be either 5 years or 59 and a half, whichever is a greater period of time um to avoid the to have a qualified distribution, which means that the earnings are taxfree. So now with that said though, even if you need to take money prior to that, you can always take out your original contribution and that is tax and penalty-free because it’s your money back. So now you must have compensation right in quotes or earned income. So for 2026, these are your contribution limits. So it’s 7500 a year uh if you’re under age 50, 8,600 if you are over 50. Um and they have a catch-up provision uh of of 1,100. So now there’s no age limit. All right. There are some income limitations as though if you earn a certain amount of money or over you are ineligible to make a Roth contribution. There are some back clauses that allow you to do that. We talk about that. Companies are now offering Roth 401k contributions with higher limits, right? You can do you can do up to 24 5,000 for this year. Then you have a catch up provision of 8,000 if you’re over age 50 to 59 and then over age 64 and that that weird window they have that super catch up for a couple of years where it’s uh instead of the 8,000 you can do 11,250 and that is from um ages 60 to 63. So if you’re in that age this is a temporary thing. Hopefully they make it permanent. But that’s kind of where we’re at right now. Oh, also if you have any questions because we will leave time at the end to answer questions, uh, go ahead and enter that right into the chat or into the Q&A um box and we’ll field those at the end. So look, while some of the baby boomer couples retire at the same time, one spouse usually retires before the other, right? So in in such case you can take advantage of the the spousal IRA which allows a a working spouse to still contribute on behalf of their non-working spouse. So even if one spouse does quit working if they’re retired or they’re a non-working spouse that working spouse still has still has that option. So conversions. So in short, the way the way a conversion works is you would take money from your traditional IRA, right, the one you’ve been converting to, and move sed funds into a Roth IRA. And what happens is, however much money you convert, it’s recognized in the year of the conversion. So, and partial conversions are are are permitted, right? So, let’s say you have half a million dollars, easy math, in an IRA because you rolled it over from another firm. Um, and I want to convert a h 100,000. This would be Jill. So, what she’s going to do is she’s going to have to add she’s going to move that h 100,000 to her Roth and then she’s going to add $100,000 to her income and she’ll pay it at whatever tax bracket she falls in. But from that point on, whatever that $100,000 into a Roth grows to, it will become taxfree when she takes it out. So again, I just mentioned, but this is kind of visually. So the 59 and a half, right? After 59 and a half, as long as you’ve held it for more than five years, any withdrawals on the earnings are taxed and penalty-free.
So who can do a Roth conversion? Anyone. Anyone who’s eligible, there’s no age limits. There’s no income limits. You don’t have to be working to do your conversion. And that’s kind of one of the nice things.
Ah yes. So there was a question on the back door. Uh we will we’ll field that at the end.
So the tax cuts and jobs act right. So that eliminated so a reccharacterization. So so the reason why they say you’re stuck with all your Roth conversions. Prior to 2018, what you could do is you could convert to a Roth, but you had the option to change your mind. You say, “Oh man, I converted too much or something like that, and I want to change my mind.” And bring it back from a Roth to a regular IRA. And that was called reccharacterization. So after 2018, that’s done. It is a one-way street on your con on your conversion. When you convert, it’s there. So kind of make sure you want to do this when you’re doing it.
So, one of the nice things and this is one of the reasons as far as the strategy goes is that your Roth IRA, they have no required minimum distributions. So, no RMDs, right? So, you can decide when to take it. Um, it allows your accounts to grow in uninterrupted for life and when you pass away, your heirs receive that taxfree. So, for those of you who may or may not do, when you um when you pass away with like an old 401k or an IRA or something like that, your beneficiaries, if it’s not your spouse, your beneficiaries have to take the money and distribute it out within 10 years. So, your spouse has the ability just to take that over and when they pass away, then their beneficiaries will have that 10-year clock and start counting. Um, so why does that matter and why is that such a big deal? So
you it allows you to take as much or as little as you want, right? And it becomes a factor for like major purchases like, oh my god, I need a new roof or I want to do this cruise around the world or whatever that might be, right? Because that can change your income for that year if you take it out of a regular IRA because uh easy math. I have to replace my roof and it’s going to cost me $30,000. Well, in order for me to net $30,000, I might have to take $40,000 distribution out of my IRA, have mold out 25%. I get my 30,000, pay for my roof, your total income when you’re retired and you’re on Medicare, right? You have that Irma, which is that income related monthly adjusted amount, the IRMA. We hear about it, they talk about it. So, that might impact you on the penalty because you’ve earned too much and you might have to owe more money on your Social Security or on your Medicare. And we’ll talk a little bit about that later. I think there’s some slides on that. Um, and those are tax cliffs. So, you do want to stay in control of it. The other aspect is that uh I think we’ll talk about this later too is how this goes to beneficiaries, right? And how this goes to your spouse. So being able to control your income that you are forced to take is important, right? So this is a way to reduce the risk of rising tax rates. Do we know tax rates are going to go up? No. No, we don’t. Right. But we do think there’s a pretty good chance because historically we’re in a relatively low tax period even though it doesn’t feel like it. So it does provide you with some additional benefits as a hedge against rising tax rates in the future, right? Most of most of which we just don’t have control over, right? What will that tax rate be? We don’t know. Will it change at all? We don’t know. But we do know that if we have some money that’s tax-free, we can control to where hey, you know, we’re going to take some from taxable um some from our tax deferred accounts and maybe a mix of Roths. You know, I’ I’ve read this and I’ve heard this people ask which order should you take money from? And this general school of thought is you take it from taxable accounts and then tax deferred and then Roth or your tax-free account. And that is true at a very high level. But I would tell you this is something you should probably or like we talked to this um with our with our clients and the members here to say hey you know it depends on what your spending habs are going to be. It might be a mix uh and it might be greater on one than the other. Just depends on what you’re trying to do and maybe those tax impact uh on some of your income. So you’re right at that bottom one your social security benefits which are your Medicare part B. So it matters and your social security benefits to a degree, right? Because there’s three tiers of how much of your social security is taxed. Whether it’s none of it, half of it, or 85% of it is taxed at whatever tax bracket you are. The reality is is most people, if you are on here, you are probably going to have 85% of your social security tax. And yes, for those of you who might be railing against that statement, that is probably close to a double taxation because you’re already paying to it now. So, Social Security and Medicare, right? So, 100% taxable and 100% is included in your provisional income. Um, and it’s included in your Maggie for Medicare pricing, right? And that’s where your Irma comes in. So,
let’s see how that showed up. So where your Roth it’s not taxable at that time of distribution.
So yes an IRA is taxable and a 401k distribution is also taxable at regular at your regular tax rate is taxed as regular income. Um but it is not included in your provisional income. Right? So, if you have a h 100,000, but you take 20,000 out of your Roth, you’re really only showing $100,000 on your income. Though, that 20,000 is not included in for Medicare pricing or for federal income tax. So, there’s some advantages there. So, I’m going to show you this. So, and and and I think this is a really good example, but there’s something that that I would tell you some caveats to this. So, it’s it’s a visual. I think it’s a great visual. So, if you look at this, it shows a $10,000 IRA, right? So, if I don’t convert it and 10 years down the road, assuming we’re earning 5% a year on this, right? So, 10 years down the road, my my $10,000 IRA grows to $16,289.
I’m going to make the assumption that 10 years down the road, I was in a 12% bracket now, but that bracket creeped and now my same income is putting me in a 24% tax bracket. So now my 16,000 after tax is 12,380. Whereas if I converted some of it now, right? So I converted $10,000 and I paid that 12% tax, I got 8,800 bucks. Um so 10 years down the road it’s 14,3334 sorry but it’s taxree when I take it out I owe the government zero on that. So, that’s a little food for thought, right? That because it’s not well, it does matter on how much you make, but it also matters on how much you keep, right? Because this is one of the things that we look at. I have clients call me this all the time like, I don’t want to pay taxes. What can we do to save taxes? And I’m like, well, we can do some things, but you don’t want to be so obsessed with saving taxes, right? What you want to do is what nets you. If I can get a 4% tax-free, but I get a 7% taxable, even if I pay taxes on it, if I’m still netting more money in my pocket and it doesn’t impact me negatively on those other things, you do it. And that’s one of the things that we talk to the clients about. Um, and that is a conversation we have a lot more often than one would think. Um, so, so that extra 1,900 bucks in your pocket, that’s like almost 16% more in your pocket just because you did a conversion 10 years prior, right? So, this is the can the reality of it is this isn’t something that you would really see the benefit from today. As a matter of fact, you’d see you’d experience a little heartburn and a little sadness today because you’d have to recognize it and pay taxes on that income. So here’s a chart that I think visually is a good idea to look at and explain that what that on the on on the left it’s right it’s your tax rate at your withdrawal and the top part is your tax rate at your conversion. So you start at the top and you say well look I’m in a 12% tax bracket and I think taxes will be higher. I think it’ll be 22. And if you follow that down, you’ll see that 12.82. And what that basically says is you’d have 12.82% more money, right? So there’s your 12. Now, if you earn 24, as this example says, you will have made you will have ended up with about 15.79. We’re going to round that to 15.8% more money in your pocket, right? Take home. So the moral of the story without getting too tied up in this chart, the higher bracket you are in later, the bigger your savings are. So a quick strategy from that respect is that anything that you do convert, one of the ways that you can look at this is say, okay, I’m not going to have everything in my Roth, but you know what I can do? If I have to just I’m going to use this example. I’m going to do a 6040 stock tobond portfolio. Do you know where I want to hold more of my stocks? In the Roth side because it gives me a much better chance at growth over those 5, 10, 15 years. So, your growth grows larger quicker, god willing, and the remainder part like that fixed income, your more conservative place, it grows at a slower rate, which starts impacting your RMD, right? So, it’s a lower RMD. So, it’s these type of subtle strategies as part of your allocation can then help you maybe mitigate some of those taxes down the road. So, that’s the savings. So, one of the things when we do on the planning tools when we’re working with our our clients here, excuse me, is that we look about look at like maybe some effective tax rates at specific periods of time, right? So, there’s federal income tax at your green barn, then your other income tax. capital gains, um just some of your gross income and and this is something you want to start doing candidly before you retire, not in a huge amount, right? So depending on how much you’re earning, this is one of the things we look at and how much your income will be at retirement and how much you’re actually going to need on your cash flow, right? So, it’s a great time to maybe utilize some of that lower tax bracket to do some conversion to put yourself in a much better position down the road. So, these are the things that we look at, right? Your future tax situation without that conversion, today’s tax situation with the conversion, right? I’m going to have to pay Uncle Sam right now. And how this affects your income taxes, those Medicare premiums, that Irma, right? And there’s that 3.8 8 net investment income tax. Um, which for households it’s uh if you’re over 250 on your income. Um, and one more thing that’s not on this slide, it’s your single versus married tax rate, right? And I’ll show you an example of that, but if you’re married, unless you’re fortunate enough to die at the same time or at least in the same tax year, one of you will continue on in a single tax bracket, right? you will end up being in a higher tax bracket most likely just because you’re single. And I’ll show you that example. So, how much income before the next tax bracket? So, income, our income brackets aren’t retroactive, right? They’re progressive in that the more you make, the higher tax rate you pay. Now, an example of that, so like standard deduction, this is the 2025 tax brackets, right? So you get your standard deduction. So in at 10% you know that 23,850. You can earn another 50 grand more and still be in the next bracket before you jump into the 22 and you can earn that 109 and so on and so forth. Let me show you the next slide which I think gives you a really cool example of this. Right? So you can earn that much and still be in the 10 in 10% bracket. you can be in that much and still be in the 12. So on and so forth. The neat thing about this, because I’ve heard folks say this, they’re saying, “Oh, you know what? I don’t want to work part-time. I really love it, but I have to watch how much I make because I’m worried about income tax.” Well, I’m going to go back a million years to my my accounting my accounting professor back in college. And he’s like, “Look, if you make 130,150, right, and you make that $1 more into that 22% bracket, you’re only paying the 22% on the extra dollar. It doesn’t go back to dollar one. So, if it’s something you need or something you want to do, um, frankly, do it. Earn it because it’s still putting more money in your pocket.” But I would say this, and to give you an example of this, remember when I talked about, oh, I have to fix my roof, right? If you have to take a vacation and you need that $30,000 because you want to go on a big fancy cruise, at least it’s something you’re enjoying. If it’s something that you have bumped into another tax bracket because you have to fix your roof, that’s just like insult to injury at that point, right? You got to pay taxes. It bumped you into another bracket and you have to fix a roof, which nobody says, “Oh, this is a joy.” or here in Houston, fix your foundation because it cracked. Um, so being able to utilize that conversion, we call it filling the bucket. So, as you can see before your conversion, right, part of that is you filled up the 10% with your income and then that next bucket of income, you’re paying 12%. And then the next bucket of income, you’re paying 22, but you didn’t quite fill that bucket. So, you’re like, you know what? I can convert some of this money now. I’ll do enough to fill that 22% bucket. So, I’ll pay it now and then later hopefully I’ll be able to save something later on some taxfree growth. So, it’s called filling the bucket. I will tell you filling the bucket. There’s some cases on filling the bucket and maybe the next bucket depending on what the next bucket is. Visually, since I have this up, it’s a really easy example. Going from 10 to 12 isn’t that big of a jump. Going from 12 to 22 kind of matters. 22 to 24 isn’t that big of a jump, but going from 24 to 32 is a big jump. So, we always want to be cognizant of how much we’re going to be converting. And really, that I would say is a discussion that you have in the very beginning of the year. So, you say, “Hey, this is what we’re planning on doing. Maybe we got a remodel coming up. Maybe we have a a vacation coming up. Maybe we want to buy some property and we need a down payment.” Whatever that is. But discussing your cash flow with your advisor and maybe bringing that up with your CPA is not a terrible idea. Um, so this is something that I talked about your Medicare, right? Um, and this is the Irma, the IRMMA. So for those of you who are already retired,
uh, so someone asked about the conversion date. So that is um calendar year. So uh December 31st. So this is for Medicare. So if you don’t already know because you’re not retired yet, when you retire or turn 65 because you you should sign up before so you don’t pay the penalty for that. Um even if you’re still working, you’ll pay for Medicare, right? Your part B. Your part A is free, your part B that you have to pay for. And that is $22 at least today. That is $22.90. So, and that’s assuming you make under$ 109,000 if you’re single, 218 if you’re married filing jointly. Right now, if you go over by $1, you are welcome into the next bracket. So, if I make $109,000, I’m fine. I’m at the 20290. If I make $19,01 now my monthly premiums for that year go up $228410.
If you make the $137, right? And now I make 137 and $1, my 284 goes to 405. So you can see it’s quite the penalty depending on how much your income is. Now, don’t get me wrong. If you need the income, you need the income. But one of the things on RMDs is that IRA starts getting larger and larger. And I can’t tell you how many clients I’ve said, well, I’ I’ve heard say, “Man, you know what? We need some of this, but we didn’t need as much. We didn’t start converting. Got them later.” So, this isn’t right or wrong. I would say if there’s a glass half full, it is one of the uh problems of having money, right? Um, but you can maybe mitigate some of that and being aware of that is being able to control how much your taxable income is down the road. Um, bigger Roth conversions in years with an unusually low income could be beneficial. So, if you’re a business owner, so this is kind of a smaller niche, right? So, business owners that have really big expenses, uh, some a year where you’re low on sales, uh, we have some losses that you can write off or some high medical bills. That’s kind of a time where you say, “Hey, let’s convert a little bit more because I’m in a lower bracket.” Or, you know, after retirement, but before you receive your social security benefits, right? So, so for example, you might say, look, I’m going to retire at 65 or 66, but I’m not going to take my social security until 67 or 68 or 69 or 70. Um, maybe I’d like to utilize that time to maybe do a little larger con conversion, but these are just some of those scenarios. So, the original owner, right? Moving on to the original owner here. Um, your minimum distributions for IRA are at 73 unless you’re born age 60 or later or I’m sorry, born in 1960 or later, uh, then it’s going to be 75. So, now this is important, right? Because if you don’t take your RMD, you can take a penalty of 25% on that. So, oddly enough, it’s actually lower because it used to be 50% a few years ago, but still a 25% penalty for that is pretty hefty. You’ll still want to do that. Um, and as far as your RMDs go, we’ll give you kind of an idea of what that RMD looks like. So, if you are 73, uh, easy math, and you have a million dollar in that retirement account that you have to take out, that’s about 37,800. So, kind of as a general rule, you’re going to look at like 38 to 38 to 40 or yeah, on a million, 38 to $40,000 on your first year. Obviously, if you have half of that, like a half a million, then it would be half of that. if you have 100,000 etc etc but it’s somewhere around 4% for your first year just to give you an idea and as that keeps growing right if you were fortunate enough to have invested prudently along the way if that outpaces inflation right guess what your RMD is going to continue to go up because it’s a larger percentage as you can see the older you get the larger percentage you have to take and these tax tables go up to like 110 10 115. So you’re not going to outlive the uh RMD tables. So So be careful about your maximum deferral. And I would say I’m not sure about this one, but I mean this isn’t a vacuum, but they’re just saying, “Hey, you know, if you’re going to defer into your IRA or your 401ks, your 401ks and your IAS, you just do that traditional deferral because because I’ve talked to accountants are like, “Hey, you know, it’s going to reduce my taxes now.” I’m like, “Yeah, let’s talk about how this impacts you later.” And they’re like, “Oh, um, so that becomes a problem, right? It becomes a problem down the road. So you kind of want to get ahead of that. Maybe it’s a mix of some traditional 401k, some some Roth 401k if your company offers that. Yes, you’ll pay taxes now, but you remember that growth becomes taxfree later. Um, and this is this is one of the concerns. This is kind of what I talked about, but I think the illustration because a picture’s worth a thousand words. And basically it says this look, you have an IRA balance of a million dollars. I’m going to use a million dollars because that is easy math. Hopefully many of you are there um at age 73 and it it’s going to earn 5% a year but the inflation is 2 and a half percent. So when you look at that RMD that’s taken out, right? Two things. One, your growth is outpacing inflation and that’s how they kind of look at RMDs too, right? So what’s going to happen is you’re going to have that balance start increasing. So your amount that you’re going to have to draw is higher and the percentage that you have to draw is higher. So way again to mitigate that is start doing some conversions earlier, right? And what you can do is that’ll it’ll help minimize pushing you up into that force tax bracket. So R&D amounts, right? So, this graph that I’m going to show you in a little bit, um, it talks about your distributions being too high, right? Which is a great problem to have. I will always say this, and I’m I’m not I’m not going to say this is a negative. Nobody enjoys paying taxes, but you know, candidly, successful people pay taxes, right? So, if you’ve worked your whole life, but maybe there’s a way that we can kind of reduce some of that tax uh burden. So, let’s look at this. So, so illustration wise, right? So, this blue, the dark blue is is Bob and Mary. They’re taking their social security. So, this is a scenario where they have social security and pensions, which I understand pensions are becoming less common. I would almost say they’re at a point where they’re relatively rare now. I would say the vast majority of people do not have pensions with their current employer. So, but bear with me. So, they’re retired. Everything’s going great. It’s rainbows and bunnies. The red line is what their total expenses are. So, they’re chugging along. Their expenses are covered by their social security and then they have their pension. So, it gives employ money and then they have to start taking their RMDs, which they don’t necessarily need. So your expenses go up because now you have to pay taxes on those expenses, right? And as you can see, your expenses continue to go up because that RMD continues to get larger and then it adds to your taxable income. Now this is that example, right? So one of the things they can do is they’re looking at cumulative taxes over that period of their lifetime. Um and this is one of the things, right? We make these assumptions. are like what would taxes probably be or even based on current tax brackets. Now, if you base it on current tax brackets and the tax brackets go up, it’ll be a higher savings. If they go down, the savings will be less. So, that’s why we look at it. For some folks, we’ve looked at it. We’re like, “Hey, look, I don’t think it’s a great idea to um to do any conversions and kind of this is where the reason is. You’re not really looking at the savings.” Um but it depends and it won’t impact your Irma. So, one of the calculations that we run as part of our planning are Roth conversions, right? So, you might say, “Hey, look, you know what? I want to convert 60,000 over the next eight years. Um, and let’s see what that looks like, right? So, in the very beginning, you’re going to be paying taxes on those conversions, right, over the next eight years. Um, but then you and you start looking at your income tax and then you start looking at the reduction in taxes. And what happens there is because that Roth keeps growing. So it reduces what might have been your taxable income on your RMDs. So based on those base facts, right, it reduced your taxes on that same scenario 140,000 almost 141,000 over the course of their lifetime, right? Um, and the assets themselves because of their taxation, the overall assets are about 800,000 more. Now, this is really obviously if they passed away, it’s not really going to benefit them much, but it’ll benefit their beneficiaries. And if you have a choice of do I want to give this to my beneficiaries or do I want to give this to the IRS, more often than not, most people would rather give this to the IRS. I will tell you additionally when you’re talking about beneficiaries, um we’re going to talk about surviving spouse here because this will matter too, but beneficiaries later is that there’s a very good chance that our kids are in a better in a higher tax bracket than we are when we’re retired. But moving on to the spouse. So this is Adam and they file jointly, right? So they’re married and filing jointly. So their total income is they have IRA pension income 58,841. Ann’s getting her social security. She’s getting 30,000 a year. Adam also gets that. So they have to pay taxes a little over 8,800. Now their access after tax income is 110,000 just like magic, right? It worked out really easy for illustration. So that puts them at a 12% tax bracket. So this is where Roth conversions kind of matter. So, Adam passes away. So, and
it’s unlikely that your your expenses are going to cut exactly in half, right? So, we’re going to assume the income needs are about the same or even if they go down a little bit, they’re not going to go down by half. So in this scenario, what we say is, well, Anel gets her social security, but she doesn’t get Adam’s social security. Now, there’s a calculation where she will get some survivors benefit, but this makes it much easier just as an illustration. So, she’s going to have to take more money out of her IRA to make up for that income shortfall, right? So, what happens here is her tax burden went from 8,800 to almost 19,000, right? for that same after tax income. Now, that tax bracket went from 12 to 24 because she’s filing single now. Same income but a whole lot more taxes. So, one of the things that we can do is if you’re married, you start looking at Roth conversions earlier so your tax burden doesn’t pass on to whomever the surviving spouse is. So, when they’re filing single,
this is a really good way of viewing it in that if you look at this top one here, it’s your married filing jointly. This is what tax brackets look like. Single filing jointly. So, I’ll use the blue because it’s kind of easier. If your income is here, you’re 10 to 12, but you’re married right there. All right. And then if you go here to here, so if you’re making about this income, right? And then you have to go here and you’re making pretty similar income, you could be in a little higher bracket. So, you always want to be careful or at least mindful if if you’re married. This is something you definitely want to look at. This is something you definitely definitely want to look at if your spouse is considerably younger. Even if you’re the same age, women traditionally live longer than men. Um, beneficiaries. So, moving on to beneficiaries. And we’re still on time, so we’re okay. We’re going to go through this kind of give you an idea. So, some of the stretch modifications. So, she has taxable income, right? You inherit an IRA, you have to take that out over 10 years. And what does that do to your income? Because the old stretch rules, you can’t do it over your lifetime. You have to do it over 10 years. So, you get to add 123,000 to your income. So, you can’t take it out over your life expectancy. You have 10 years. So, your tax bracket changed dramatically. And you remember this, right? So the beneficiary is assuming your children. Hopefully your children are more successful. That’s what we always wish for our children. So they are making more money than you are. So they are in a higher tax bracket. And with that said, now they get hit for more of a tax bracket. And I have had customers say this. They say whatever. It’s still free money. And I’m like, you’re right. It is free money. But the choice is this. Do you want them to have that money or do you want to give the IRS that money? And there is no right answer, frankly, because it’s a preference. But I have I’m not a huge fan of the IRS. So, if we don’t have to pay taxes or I’d rather see my beneficiaries get that, I’d rather them get it than the IRS. And I would not consider myself unpatriotic because I do a lot for charity and I love this country, but don’t love the IRS. So, one of those things it can do is it can change their bracket and bump them up. And that is one of the concerns, right? So, you always want to be mindful of even if your spouses are the same age, do you have beneficiaries that are not charities, right? Because if it’s charities, that won’t matter. But if your kids, even though they might feel like a charity sometimes, you don’t get the tax deduction on them as adults. So, so the taxes on that $1 million inherited works out to an extra $311,000 in taxes just because of what it did to the tax brackets.
So, one of the things that you can do and one of the things that we do for our clients is we say, “Okay, hey, you’re a lower tax bracket. Let’s talk about your kids. They’re successful. They’re a doctor. They’re an engineer. You know, they’re an oil and gas. I’m here in Houston, so a lot of people are in oil and gas here or on the medical side. um we’re in a lower tax bracket, you know, so let’s do some conversions. Let’s do some conversions out of our traditional IRA. So when they inherit it, they’ll get a smaller amount, but they’ll also get it in the Roth. So I paid those taxes at a 12% bracket or whatever bracket I’m at. So when my child, son, says son here, but my daughter, son, daughter, whomever, when they get it, they’re in a higher tax bracket, but they owe zero because it was a wroth. So, so this kind of gives you like liquidity values on beneficiaries if they converted, right? And then you come over here and you’re like, well, how about if we did some conversions? The further you go out, the moral of the story is the further you go out, the greater the tax savings when it’s passed on to your beneficiaries. So, obviously, it doesn’t reduce liquidity, right? you’re still there, but you know, there’s this break even side. Um, the longer you go out, the bigger the benefit. So, the moral of the story is you have really successful kids, do it earlier. And frankly, if you don’t want to pay the taxes, ask them if they want to help you pay the taxes, right? They can gift you some money to help offset that because that’s going to be their legacy later and they can get that tax free. Um, so again, Roth conversions, this is an area we’re like, hey, you know, let’s do some money at over a certain period of time. And that’s the filling up the bucket. And what does that look like? You’re in this tax bracket, right? Where where you’re in that, oh, what would that be? The 10, 12, like the 22% bracket. So for the first few years, what does that look like? Those are taxes right there. the red, nobody loves that. But if you see down the road, you look at the reduction in taxes down the road. And this actually does not even include the reduction in taxes to whomever your beneficiaries are, right? Because they would actually most likely be paying at a higher tax bracket than you are at that point. So with that said, quick summary. So gives us a few minutes to uh ask any questions or talk about kind of what’s going on out there. What future tax environment, it’s uncertain, right? But it points to higher taxes. But I can tell you spouses, right, go into a single tax bracket. Your children, if you have children, they’re probably in a higher tax bracket than you are. So Roth IAS are certainly the most taxefficient asset you can leave to your heirs and you can become a little more aggressive if you know that’s going to be down the road. Look, we’re here to help. We can answer your important questions. We can help you come up with a withdrawal strategy and we can decide throughout, you know, whether you use your IRA, whether you use social security. This is part of our planning. We are fiduciaries. I’m a certified financial planner. Um, evaluate your employer plan and kind of see where you’re at and maybe we can look at some uh Roth conversions and just kind of help you pass some of that money to your beneficiaries.
So, these are some of the things that we can do, right? We obviously can help through some of those questions that are answered, right? You don’t know what you don’t know. You know, taxes, cash flow, maybe we can ask a question. You’re like, gosh, I never even knew I needed to a ask that. Um, some of the estate planning coordination. We have no fee products out there. Um, we have regular retirement strategies as well. Um, lifetime income strategies, some dividend portfolios. So, we actually have some very lowcost passive portfolios. But I would tell you, you wouldn’t come here just because it’s cheaper, right? Our strategies and we have things that you can do that you normally can’t do in the retail side. I mentioned this if if you need some basic estate planning. If we’re managing uh some of these for our customers here, we have some of the basic planning that we do that without cost. Um even if you’re not, we actually have some that the costs are actually still less expensive than you do this than you doing this through an attorney out there. It’s one of our third parties. Um, so look, I want to thank everybody for attending. So, we’ve come to our Q&A part. We have some questions out there already. So, I’m going to put up a one question survey on whether you actually want to have a call from me to talk about a specific situation um or if you just have a general question or you want to schedule some time to maybe look at some actual well planning if you haven’t done it. We are a vastly underutilized resource here at the credit union. You can access my calendar directly to that um through that QR code. Let me put up the poll and then we’ll get to the Q&A. So, some of the questions out here. So, you rolled over prior a prior 403b to a traditional IRA. You’re over the Roth income limit. Would a traditional IRA prevent me from doing a backdoor Roth? No, it doesn’t. And someone else had a question. Um, and someone else had a question on what that actually looks like. So, essentially a backdoor Roth is you would contribute to an IRA because there’s no income limits on the contribution comport portion of it, right? It’s just the deductibility. So, easy math. I put in $8,000 into my IRA and then I do a conversion immediately into a Roth. So, what’ll happen is I will get a $1099 later that said, “Oh, okay. You did an $8,000 conversion.” But since I didn’t get the deduction on that, I or my CPA will file an 8606. And I’ve had push backs from accountants that did not know this that I just explained it to them and said, “Hey, nope. This is what I do every year. You just file the 8606,” which basically means I had a non-deductible IRA that earned me $0. So, that is how you do the backdoor Roth. uh in short uh but hopefully candidly if you have if you’re still working and you have an employer ask them if there’s a Roth option that’s an easy way to do it because you don’t have income limits on that and you can put away more money so you still pay taxes on it so that part’s kind of a bummer this year but remember you’re actually doing this as a long-term strategy down the road uh let me see let me couple here I am 60 years old and not working I’m currently withdrawing money out of my IRA to live. Does it make financial sense to do a Roth conversion? Maybe. Um, so what we would do is what we would do is we would take a look at your cash flow. So if you are not one of the yeses, go ahead and change that to a yes or take that QR code and just schedule time and we’ll take a look at your specific situation, right? Because again, the importance is how much you need, how much you’re taking and how much you need, right? Um, you still want to be able to live your life because you’ve worked your entire life for that. But by all means, you certainly want to do that. Um, we can we discuss about charitable gifts. Yes, we could, but there’s not enough time. I am sorry about that. But in short, there are some things that you could use for some charitable gifting to reduce your income even in your RMDs. Uh, you can do a direct contribution so it satisfies that RMD without having without having to take a hit on that. Uh, what else do we have?
I think that covers it. You guys had some great questions. Thank you so much for your participation. This always makes this a lot more fun for me. Um, I’ll stick around for a couple of minutes after after we sign this off. So, if you have some questions still in the chat, I’ll still be around for a couple of minutes. But again, thank you so much. I hope everybody has a happy and safe Fourth of July. If you are into World Cup, go USA. Uh, and we will see you on future webs webinars. Take care and be safe. Bye now. Oh, hey, just quickly. So, it looks like I’m sorry, there are a couple of questions. We have some folks still hanging out here. Uh, it look like Judy, it looks like you’re still on. So, there was a question on some emergency savings and you have to do a new roof. Is it better to do a Roth conversion first? No, not if it’s an emergency savings. So, I can tell you I’ll give you an example of what I’ve done. So, I’m going to need a new roof in the next few years. So, I’m probably going to try and pay that before do that before I retire just out of my cash, right? The emergency part. Um, but but the short answer is depends on how much of an emergency savings you have in your cash flow. If you’re not one of the yeses, go ahead and change it and we can look at your specific scenario to say yes, how much is that roof cost? How much you have because you don’t want to take your emergency savings because you might need an you might have an emergency, right? So, we can talk a little bit about that. um
uh a couple 401ks. Again, we can look at your cash flow, right? And what kind of impact your age, what kind of impact that might be have on your tax bracket. Let’s see.
Is he still on here? He is. Oh, he is. So, Gary, um so there’s a question on having money with Schwab. Uh, I would say that look, you can always work with a pro. Look, we would love to earn your business here at at the credit union and Aerys. We’re a division of that. We are the financial division. I’m a fiduciary. The end of the day, I’ve been doing this 30 years. Um, it would be up to you. Whatever you’re you’re more comfortable with. I can tell you that uh they’re not necessarily mutual exclusive. You can go ahead and ask us about it and see what we would look at and then you kind of go from there. But we would love to earn your business, but if you haven’t figured out, we’re pretty low-key about stuff. So, because we’re all members of the same credit union here. So, I think
yes, we do handle couples who are thinking about filing separately. Um.
Ah, yeah. No, that makes sense. Yes, we do handle that. And as a matter of fact, when we do our planning, right, we look at that. So, oddly enough, you would be surprised how common it is, and I think it’s more common now than it used to be, where there is a ours, there’s ours, and individually, right? It’s a mine, yours, and ours. So, we even run plans separately. Uh, so it’s one of those things. I don’t know if it’s cynical. I just say it’s more pragmatic. So that way you don’t have to decide what each person is doing. You’re saying, “Hey, look, this is my goal.” Um, I think it’s a very pragmatic way of looking at it. So yes, actually that’s how my assets are run together. Um, it’s ours, but she has power of attorney and everything else. So with that said, it allows me the flexibility to do whatever I am as far as how I’m structured. And you are retired on that. So yes, we could still take a look at that. Even if you’re retired, we’ll still look at your cash flow and your tax bracket. how much how much room you have in your bucket, right? Whether you’re going in the 12 to the 22 or the 22 to the 24. All right, I’m trying to see if there’s any questions. I love the questions. This makes so much easier so you don’t have to hear me just drone on and on.
Oh, okay. So, this is one. Um, if my spouse retires in January and you exceed the 218, I understand that I have to pay Irma in 2028. That is correct. Caveat, look back. Okay. So, yes. So, there’s a question. So, we didn’t talk about this on the Irma, but as far as your Medicare calculation, they use your income from two years prior. So there is not a guarantee but you can request a recalculation or you can and and um or a concession um in that you’re saying hey look I know this is my income but I am retired would you please use this current income instead so that’s actually an option out there uh and yes that made that made sense that was actually a really good question I should actually add that as a slide for future uh because it’s not necessarily stuck that you are that you have to go from two years ago if if there’s something significant change like you’re not working your job has changed or you retired um you look at that I think all right I think I covered the questions and they were great questions
all right I think I got them All thank you for your patience um and thank you for attending. So everyone have a great night and we’ll see you on future webinars. Take care. Bye now.