What’s up? Two minutes after the hour. Let’s go ahead and begin. So again, good evening everyone and my name is Baptist Bruner and I’m a Texas-based financial consultant with Alliant and just a part of a team of financial professionals with the Lion Retirement Investment Services who give regular educational webinars. Again, like to start by thanking everyone for taking the time out of your evening uh join us today. Get a better understanding of Roth conversions, which can be an effective retirement tax strategy, but it can also be a great legacy planning strategy. We’ll get into that too. Uh this presentation will be about 4550 minutes long. Might be able to do it a little bit quicker. Might skip a few slides. And as always, we will have time at the end to ask any questions that you may have. When that time comes, uh, just go in the question and answer the chat section. Go ahead and take the time to identify both of those. Now, there’s two areas where you can ask questions. Q&A or the webinar chat. We’ll get to it when that time comes. Go ahead and ask away and I’ll be sure to get to them.
All right. Uh, we’ve had some problems with this as of recent. Few people have been throwing their AI notetaker in. Please don’t do that. Um, proprietary information, I don’t know. But if you want to take a photo of the slide, I can’t stop you from doing that. So, if you find some good beneficial information in this presentation, I cannot stop you from taking photos of it. But let’s just keep the AI notetakers out of here for the time being. All right. some of the upcoming webinars that I will be presenting. Uh two weeks July 9th, designing your retirement income blueprint, coming up with a strategy to maybe fill in your income, utilizing your social security, maybe you have a pension or an annuity, what are the best ways to draw your retirement income? What might be a better tax efficient strategy? What might be a better way just doing it to where you are able to grow your estate and your wealth best? bunch of different things in here. Great webinar. And then after that one, we’ll have another one that’s another evening one similar to this later in July on how to get rollover ready with IRA planning. Great webinar here as well. Maybe trying to transform your 401k into an IRA where you will have much better and a much larger um investment selection available to you. So consider that as well. And of course, our team at Alliant Retirement Investment Services. We are focused on helping you, our members, understand the ins and outs of investing, saving for retirement, and of course, much, much more. Go ahead and take a photo of this one. Nobody will get mad at you for that. But take a look at our website, aerys a r i s.alliancreditun.com, uh/events will bring you to our webinars page. Uh, we have a podcast on there. hasn’t been updated in a while, but I think Christian’s going to do another episode on there soon. Now, really great resource. And then, speaking of resources, we also have a resource center. So, slashresource center-c center. Lot of calculators in there, tips, tricks, everything. Go ahead and take a look on there just to see our podcasts, uh, our webinars, and our resource center. It’s a free tool available to you as a member.
And I’m on the investment side of things with Alliant. You know how we can help. We do complimentary foundational financial planning, investment management, management, advanced planning, you know, showing you a comprehensive range of investment choices. But a new thing that we’re offering is more and more help on estate planning. So, you probably joined us for a couple of our webinars on estate planning if you’ve been on a few of these before. Heck, I think I just did one two weeks ago. But a new thing that we have um is an estate planning tool available to our clients, those who are investing with us. Uh we have a subscription at trustinandwill.com that’s at no cost to our clients where you are able basically use the digital platform for estate planning to create your will, a trust if necessary, and they have attorneys readily available to you to can ask them questions if you do get stumped along the way or if you just need some more help. But it’s a really great digital tool for state planning. So consider that.
All right. So now we’re going to start talking about taxes and the actual subject why everyone’s here today. But let’s just start with the future tax environment and how budget deficits and titlements and taxation can affect Roth IAS. So, here’s a scary number, and that is our current debt. Over $36 trillion, over $16,000 for every single person in America. That’s including recently born babies all the way to those who are 110. And as we look at budget deficits, for example, over the last 10 years, what you’re going to find is they’re on average about a trillion dollars most years, more or less. And I’m really talking about the 2014 to current days. And when you get into 2020 20, you know what happened? Co hit and all of a sudden we go from a trillion and those types of deficits to to three trillion pretty much overnight. So you have that in both 2020 and 2021 and the deficit spiked up and so far has not come back down. And that’s caused a pretty sharp increase in the overall debt which is about 36 trillion. And maintaining that debt when interest rates are low is one thing, but with interest rates rising, the carrying cost of that debt, it’s going to become very honorous. Let’s look at how that’s affecting entitlements. So, Social Security, Medicare, Medicaid, as well as the interest payments on those debts consumes all the tax revenue that you have coming in. And according to the Congressional Budget Office, that’s actually going to happen in 2035. So, consider the impact of that in another 12 to 13 years. It leaves nothing for everything else like human health and human services, highways, defense, all those other things that becomes pretty problematic as you can see. So if you’re the government, there are really only two things you can do to counteract that problem. Number one, you can cut spending, which yeah, do we really see that happening? or what we’re more likely to see is taxes being raised probably starting with the highest earners, but at some point it will trickle down a bit to the lower earners. And then the middle and the middle high income people eventually will feel the impact and they’ll probably be the ones that get hit the hardest. And one of the troubling aspects of IRA planning is that the tax rate on your future distribution is just unknown. Even if you can project your income with relative confidence, there’s no guarantee that tax rates will remain the same. And while it’s hard to find someone who doesn’t think they pay too much in taxes now, I hope everyone on the call thinks feels that way. But the reality is that the top tax rates today are pretty low in a historical context. So just take a look at this chart. See what I mean? When the income tax was first introduced in 1913, the top rate was only 7%. But within just a few years, top rate had already skyrocketed to over 70%. And after dropping back down to as low as 25% after World War I, top rate jumped to 63% in 1932. And from there, it wasn’t until more than 50 years had passed when in 1987, the top tax rate finally dropped back below 50%, letting those in the top bracket keep more of their income than they were forced to give over to Uncle Sam. Now, of course, not everyone pays that that top rate. In fact, it’s only a very very small percentage of Americans that do.
I’m sorry, but that said, our national debt is at an all-time high. We have a budget that hasn’t been balanced in years and fiscal troubles left and right for many of our entitlement programs like Social Security and Medicare as well. And it’s possible that rates could go up across the board. And that makes coming up with the right plan just even more important. So how can you are how are we preparing our clients to guard them against that? You know, we talk about diversification of investments and that’s important, but we also need to look at diversification from a taxation standpoint. And that brings us to three areas. Tax now, tax later, and tax never. So let’s look at tax now vehicles. That’s going to be your non-qualified assets like your brokerage accounts that are in managed money mutual funds, stocks, bonds, CDs, etc. Then you t your tax later options include those tax deferred vehicles like your IRA, your pre-tax IRA or a 401k, maybe an annuity. Um, and then there’s also tax never. That’s going to be things that have a big tax advantage. And we’re going to be talking mostly about Roth IAS today in addition to that, but there’s also something like a municipal bond or an HSA would have a tax-free feature. Um, life insurance can also be another one of those as well.
So, if approached correctly, a Roth IRA conversion can be an effective strategy and effort to keep as much after tax tax-free money as possible. And today, we’re going to look at a few important issues that must be considered if you want to consider a Roth IRA conversion. So, one, we got to go through the basics behind a Roth IRA conversion. We also need to go over the considerations for the original owner of that Roth IRA. some other considerations for the surviving spouse of that Roth IRA owner should it be owned by your husband or your wife and then you inherit it and then the considerations for the beneficiaries of the Roth IRA afterwards. So spousal IRA, you know, more than likely if it is, you know, a husband, a wife is the beneficiary of it, that’s section three. Section four mainly referring to your kids, your nephews, your nieces, whoever’s getting your assets after you that’s not a spouse. So, let’s just start with the basics. And many of you probably know that there’s another type of IRA. Mentioned it a few times already, but it’s called a Roth IRA. And Roth IAS are similar to traditional IAS in many ways, but there are also some key differences. And one of those differences is that you don’t get a tax deduction when you make a Roth IRA contribution. So once your money is in a Roth IRA, it grows tax deferred like it does in a traditional. But the big benefit of the Roth though, and another key difference between it and the pre-tax IRA is that Roth IRA distributions can be tax-free in retirement. And so if you’ve had any Roth IRA for more than 5 years and you’re over 59 and a half, then all withdrawals from any of your Roth IAS will be tax and penaltyree. Again, tax and penalty free as part of what’s known as a qualified distribution. Even if you need to take a withdrawal sooner, you can always take out your Roth IRA contributions tax and penaltyree. And some of the same contribution rules that apply to a traditional pre-tax IRA contributions, they also apply to Roth IRA contributions. So for instance, that same, it used to be 7500, I think it’s 8,000 now for for, you know, the same $7,500 contribution limit applies. There’s also that same kind of catchup once you hit 50 and older. Um, and then, you know, I think it’s $1,100 more. So no, it’s $7,500. If you’re underneath uh under 50, you get an additional $1,100 and catch up to $8,600 once you hit 50 and over. And Roth IRA contributions are also subject to the same compensation rules as traditional IAS as well. So, if you have sufficient compensation, then the only thing that could prevent you from making a Roth IRA contribution is just having too much income. And there are ways around that, too, called a back door. We’re not getting into it today, but there are backdoor Roths as well. But you can see the income limits up here on the screen. And just note that if you’re a single filer, as long as your income is under 153,000, you can make a full Roth IRA contribution. Now, similarly, if you’re married and file a joint return, then as long as your income is under 242K, you too can make a full Roth IRA contribution. You know, while some baby boomer couples retire at the same time, more often than you’d think, one spouse retires before the other. In such cases, you may be able to take advantage of spousal IRA and or Roth IRA contributions. And these are special contributions that allow a spouse with compensation to make a contribution to the traditional IRA or the Roth IRA of the non-working spouse. In other words, the non-working spouse can use the working spouse’s compensation as their own, which allows them to make those contributions. So, the spouse for whom the contribution is being made, however, they still have to meet all the other contribution rules applicable to that type of IRA.
Now, a Roth IRA’s conversion is the name given to a special type of transaction where you move money from your pre-tax retirement account like the pre-tax IRA, the 401k, 403b, etc. to a Roth IRA. But when you make a Roth conversion, the amount of money you convert, it’s just added to your tax return for the year and it’s taxable whatever your income tax bracket, you know, whatever one you happen to be in for that year. So, in this example, let’s meet Jill here. And let’s say Jill has $100,000 in a traditional IRA, and she wants to convert into a Roth IRA. We’ll talk more about why she might want to do that in a moment, or why she might want to do it differently than this example, but we’re still in section one of the basics. So, if Jill moves forward with her $100,000 Roth IRA conversion, she’ll have to add $100,000 of income to her tax return for the year, which will be taxable at whatever rate Jill happens to be in. But because this is a big decision and can have a significant impact in your taxes, it’s always best to discuss this option with your tax and financial advisors beforehand. Now, in my opinion, $100,000 might be a little bit too much to convert just in one year, but you don’t have to do this in just one year. you can spread it out and stay in your lower tax bracket. We can help you figure that out, too. But why would you voluntarily choose to make one of these Roth IRA conversions and pay taxes before you even have to? Well, there’s a lot of reasons, but perhaps the most common reason is one we’ve already discussed. It’s to pay off Uncle Sam now so that you own your retirement account free and clear for life. Just remember with a Roth IRA, you have the potential for future tax-free withdrawals of everything in your account. So if you’re over 59 and a half and you’ve had any Roth IRA for more than 5 years, then all withdrawals from any of your Roth IAS will be tax and penalty-free for life. Keep in mind, like we mentioned earlier, taxes are probably going to go up in the future. Taxes are at a low right now. You know, you have a low rate right now. You could convert it now. and never have to worry about taxes again. Whereas, if you could convert at 12% now rather than if they increase the rates later to 20, it’s getting rid of some of the unknowns of our future.
But something else to keep in mind is that unlike Roth IRA contributions, there are no restrictions on who can make Roth IRA conversions. You can’t be too old. You can’t be too young. You can be working or you can be retired. There’s no minimum amount of income you need or a maximum amount of income you can have. I I think you see what I mean here. But if you want to convert your IRA to a Roth IRA, there’s nothing in the tax rules that will stop you from doing so.
So the Tax Cuts and Jobs Act, that was the first one that was passed back in 2018. It eliminates the recarerization option for car uh conversions made in 2018 and later. But if you convert your Roth IRA now or in the future, you are stuck with that decision. If you go forward with it, again, speak with the tax advisor, speak with the financial adviser to make sure. But if you’re making the conversion, more than likely, you won’t be upset with the decision.
Another big benefit of the Roth IRA and one that many retirees do in fact find attractive is that Roth IAS have no required minimum distributions during your lifetime or RMDs is how you may have heard them. So remember all those RMD calculations and potential mistakes. We talked about those earlier. You know, whenever you turn 73 or 75, depending on the year you were born, you have to start taking money out of your pre-tax accounts, you avoid that with your Roth funds. So, they’re not an issue if you have a Roth IRA. So, during your lifetime, you can take as much or as little as you want, and you’re not forced to take anything out at 72, 73, 75 if you don’t want to. So now, not only is a Roth conversion a great tax strategy, but it means doing a Roth IRA conversion can also be a great legacy planning strategy because now your Roth IRA can continue to grow and compound tax-free for your heirs, which also makes it just again a very very intriguing vehicle for estate planning. Your wife or your husband can take over your Roth IRA, no problems. That’s a spousal right. or your pre-tax, right? In this case, your pre-tax accounts, they get to take it on. There’s no um automatic 10-year that uh distribution period. With a Roth, when you give it to your children, they get to just keep it. They don’t want to touch it. They can just let it sit there and grow forever and give it to your grandkids if you’d like. It can be used to make generational wealth. And it’s not that hard to do in some cases. Just depends on your situation. But again, be happy to show you that. But the potential tax-free nature of the Roth IRA may also provide you with additional benefits such as a hedge against tax rates that more than likely will rise in the future. And when it comes to your retirement, there are just a lot of unknowns. What will the market do? What will inflation be like? What will your tax rate be? And so on and so forth. But that last one, taxes. It’s a major concern for many retirees and one we’ve already talked about a bit, but a Roth IRA conversion can just help you manage that risk by paying taxes at today’s known rates. And if tax rates rise in the future, then those tax-free distributions from your Roth IRA will be even more valuable. Of course, if you think your tax rate will be lower in retirement, then that would be an indication that maybe this strategy isn’t the best for you. It might still be again something we can help you figure out, but since Roth IRA distributions in retirement are tax-free, they typically don’t impact the other things tied to your income that we discussed earlier.
All right, we talked about the benefits of a Roth for estate planning purposes, but it also has anciliary benefits. Let me get up this other one, you know, including the impact on social benefits. And by social benefits, we’re talking about social security and Medicare. So, think about an IRA income in a pre-tax IRA. So, think about a pre-tax IRA. That income is 100% taxable. And it’s included, all withdrawals that you take out of it are included as provisional income for social security purposes and it’s adjusted uh it’s included in your modified adjusted gross income for Medicare purposes. So, if you have to pull out a good chunk from your pre-tax accounts, now you might be getting taxed more. on social security and you might have to pay a higher premium in Medicare. Whereas if you had a bunch of Roth funds, that’s not reportable anymore. You already paid taxes on it and the same incoming the same income coming out of a Roth again not taxable. It’s not included in that MAGI, your modified adjusted gross income. So, when it comes to pricing, how much your benefits, how much of your benefits are taxed, and how much your client’s um how much your government benefits might cost, the Roth is really now starting to show some serious value.
So, Roth IRA conversions can be able to they’re able to help you keep more money after all the taxes have been paid. Let’s just look at a hypothetical example of someone over the age of 59 and a half considering a Roth IRA. Um, in this case, it’s a Roth IRA conversion of $10,000. So, we’re going to assume that the marginal tax rate now is 12%, but the tax rate later when it is taken out will be at 24%. Now, if this individual doesn’t complete a Roth IRA conversion and just continue to let that pre-tax money grow, grow, and grow for another 10 years, and we’re assuming a 5% rate of return for both sides of this, they would have $16,289.
Then, if they take the money out and pay the income tax 24%, they would have $12,380 left over. However, if they chose to complete a Roth IRA conversion, they would have to pay 12% of the money in taxes and would have only $8,800 in the Roth IRA. But assuming annual growth of 5% per year for 10 years, they’d have 14,334 they can access income tax and penalty-free. since that Roth IRA owner in this case they hit the 59 and a half fiveyear rule. But that’s potentially almost $2,000 more or 15.8% more if they complete the Roth IRA conversion and pay the income tax now instead of keeping the pre-tax money in the retirement plan or in the pre-tax IRA and pay the income tax later when they withdraw the money. It’s a basic example. You’d be shocked to know how many clients of mine and how many members I’ve done these plans for. And it just shows how much more money you can save in taxes and in fact grow your account by. We’re talking about 15.8% on just $10,000. Apply that same number to your entire account. And now look at that higher number, but also look at it from being a tax-free number rather than a future Uncle Sam’s putting his pocket hand in your pocket in a few years. Think of those two different values.
And this chart can help you understand how a Roth IRA conversion might help given various tax brackets both now and later. You know, as you can see, moving across the top is where you will find the current marginal tax bracket. Let’s just say it’s 12%. Now, if we move down from there, you can see how much of a Roth IRA conversion, how much a Roth IRA conversion might help. But if later this money would be taxable at 24%, a Roth IRA conversion could help you end up with 15.8% more money than after income taxes.
There you go. You know what, folks? I’m going to just go ahead and say it. Take a photo of this slide. This is a good one. It could show you, hey, maybe it makes sense to go ahead and see if this might be a good tool for me.
And not only do we give these general educational webinars, if you’ve been on these before, you already know this, but we also have the planning tools available for you to take advantage of that can help determine your specific effective tax rates at times down the road. It’s just help we can offer to you. Again, it’s your decision. But here at Alliant, you have a lot more available to you than just banking and great CD rates. We can help you figure out what your future is going to look like financially and if we can hit your goals or if you can do a full conversion, etc. We have fantastic planning tools to help you uh decide if maybe a conversion is great for you. But whenever a Roth IRA conversion is considered, you must consider two tax scenarios. One, how the future tax situation might play out without, you know, without a conversion, but two, how the conversion will impact today’s situation. So, we don’t just need to look at the federal income tax bracket. That’s just one of three or four different things that you need to look into whenever doing a conversion. income taxes here. That’s important. But you also want to make sure that you’re not going to start jumping Medicare brackets. Those get kind of steep, especially after once you start getting into the third and fourth bracket. Medicare gets very pricey. Want to make sure that you don’t cross into that threshold. And then next, there’s also the 3.8% net investment income tax that was introduced back in 2013. It’s 200,000 for singles, 250,000 for joint. and they haven’t increased those thresholds since 2013. And obviously money is not worth as much as it used to be then 12 13 years ago. We have to keep all of these in mind whenever we’re talking about a conversion. And again, we can help you with that. We’re here to assist.
But it’s important for clients to watch for an opportunity to reduce the taxes paid on retirement plan money. You know, we encourage you to see your tax advisors for your own situation, but reducing the amount of tax paid may mean more money for retirement expenses or for passing along to beneficiaries. And here we see how much ordinary income a married couple both over the age of 65 can absorb in the various tax brackets. you know before moving to the 12% bracket it’s 5750 130150 before moving to the 22% bracket 2399 before moving into that 24% bracket and so on. Now there’s a couple different ways to approach a conversion. You might want to go just a fixed amount, whatever you’re comfortable with, but here’s a real savvy conversion strategy that might be helpful for you called filling up the bracket strategy or filling up the bucket. So, remember those tax brackets that we just looked at earlier? Well, sometimes you can find yourself in the middle of one of them or maybe even on the lower side of one of them with a lot of room to add before more income before you’re pushing yourself into one of the higher tax brackets. So, maybe you’re in the 12% bracket. You can convert $30,000 before jumping into the 22. You know, in 2021, that 22% tax bracket for married couples filing a joint return goes from about 81 to about 172. You might have a lot of space, pardon me. But suppose then that you file a joint return, your taxable income is 100 grand. That means that you could add another $72,000 of income without going into that next bracket. Making a Roth IRA conversion to that remaining amount could make sense for you. And a lot of times whenever I’m speaking with folks, I’m worried about this jump from 12% here to 22%. Or from 24% to 32 because obviously, you know, yes, 24 is larger than 22, but it’s not a 10 or an 8% jump. It’s a two. Sometimes it makes sense to do a little bit more than the 24. Again, everybody’s different. Nobody there’s no cookie cutter way of doing it. It’s just getting to know you and figure out what your goals are. But if you plan to convert a sizable portion of your IRA, this approach is often more tax efficient than converting the full amount at one time and instead you can make smaller Roth IRA conversions over a number of years, filling up your bracket each time. And this can help reduce the average tax rate you’ll pay on your converted money and also spreads that tax bill out over a very long period of time, making it a cheaper strategy for you. Now, higher income Medicare beneficiaries are not held harmless and have been paying more for their Medicare parts B and D coverage for several years in the form of income related monthly adjustment amounts, also known as IRA. So, the Medicare Access and CHIP Reauthorization Act back from 2015, otherwise known as DOC fix law, it enacted this new modified adjusted gross income brackets that went to effect starting with the 2018 Medicare premiums. So the 2024 tax return is used to set the 2026 income related monthly adjustments, those IMA brackets. So whenever you’re you want to know what you’re going to pay for Medicare, you’re going to know what bracket you’re going to be in already for two years out. Whatever bracket you are going to lie in for 2028 is going to be based off of your 2026 earnings. What you’re paying this year in 2026 is based off of your 2024 earnings. You have to prepare for these things years out. This is where a conversion can come into play. At least we know the numbers ahead of time, but it all comes down to just good planning. Now, Roth IRA conversions can be especially useful if you had a low income year. You know, for example, you might be a business owner with unusually low sales or you’re paying high non-recurring medical bills. Maybe you’re retired but not yet receive social security benefits, etc. These are questions to ask to see if a Roth conversion is a good move for you. You could do a oneoff year, take some years off from doing a conversion, get right back into it. Who knows? Everyone’s different. Again, now moving on to point number two, the original IRA owner. Once you reach a certain age, the law requires that you begin to take, again, we discussed these, we’re going to get into them now. The law requires you to take what are known as required minimum distributions or RMDs for short from your traditional IRA or your traditional 401k. And those same rules apply to just about all pre-tax accounts. But RMDs are simply the bare minimum that Uncle Sam is going to require you to take from your retirement account each year to satisfy the tax code rules. Uncle Sam says, “Hey, I let you put all this money away 50 years ago, tax deferred. you haven’t paid me on it yet. Now, I’m forcing you to start taking it out because I want to get paid. That’s how it works right now. And the specific age when you must begin taking RMDs, it depends on when you were born. So, if you were 72 or older as of the end of essentially, I’m not going to go through that. If you were born in 1959 or earlier, 73 more than likely might be 72. If it was 72, you’re already taking them, but it’s 73. If you were born in 1959, 58,55. If you were born after in 1960 or later, it’s 75 right now. Just depends on the age. They changed the rules for the Tax Cuts and Jobs Act. So, yes, you will have to take them out at 75 if you were born in 1960 or later. Final thought though before we move on, just remember that you can always take out more, but if you fail to at least take the minimum amount out that Uncle Sam requires you to take out, IRS can actually hit you with a 25% penalty. 25% penalty for any amount that you should have taken but didn’t. So, if you don’t take out 50 grand, you know, here comes a tax bill for $12,500 or a penalty of $12,500.
And you have to take them out by December 31st of the year. Don’t have to tax season to do it. December 31st. Of course, just most people don’t think about things in terms of factors or life expecties. So, here’s a chart I think you’ll find helpful. It shows the approximate percentage you need to take out of your IRA or your pre-tax accounts from 73 to 90 in order to steer clear from that penalty. So if you look, you’ll see that each year the percentage you need to take out increases. Doesn’t necessarily mean you need to take out more money each year than the last though is that also depends on how much your IRA gains or loses from year to year. But these are the more this is the mortality table right here. Oh no, this is just the percentage. You can find the mortality table on the IRS’s website. All you do is take your December 31st final statement from 2025, divide it by that number that’s next to your age. That’s your RMD for the year. Again, make sure you take it out before December 31st of the year. But if you do a Roth conversion, your Roth funds avoid all this and you can just keep your money and let it grow. Now, since the R&D age has increased from 72 to 73 and now it’s 75%, it may be tempting to simply delay all IRA with draws until then. Well, not everyone will be able to do this. Those that can should be aware of rapidly growing distributions that might move them into that higher tax bracket. So, you can see the different ones here. We’re assuming that the initial IRA balance uh at age 65, it earns 5% per year. You can see that by pushing it off and the larger growth now forces you to take out more money and you might go from a 24 to a 35% tax bracket. See it all the time again. Next webinar is going to be about your retirement income blueprint. We can find out ways to solve that too.
Now this graph illustrates the increase in RMD amounts when compared to inflation. It assumes that the initial IRA balance is a million at age 73 and earns 5% per year and an inflation rate of 2 and a.5% which is about the 30-year average. Now, this assumes the RMD is taken at the end of the year. And if we assume that tax brackets and deductions are adjusted at the rate of inflation, if the RMD amount is increasing faster than inflation, it could push the taxpayer into a higher bracket. And if this seems likely, Roth conversions and other strategies should be examined as part of a draw down strategy. Again, a financial professional and tax professional should always be consulted before taking actions to manage this too. So therefore, appropriate Roth IRA conversions before the RMD, before those distributions build too high, could be a viable strategy to help you keep more of your money after income tax has been paid off.
And so in fact, this is a snapshot from our tool. That’s just an example of a married couple that’s retired and living on their social security. And the dark blue, that light blue small amount in the middle is their pension. And that darker red, darker orange color, that represents their RMD. And that red line that’s going across is what they want to spend each year. But you can see that Uncle Sam’s forcing them to take out more money than they need to. This is one of the things that we look at whenever we’re doing financial planning is how to get rid of your RMD problem. We want to try to keep you in that 22% bracket or that 12% bracket, depends on where you are, but you can try to at least mitigate your RMDs to where you’re not forced to take out more money than you need if you don’t want to. Giving you more control over your money rather than letting Uncle Sam tell you what to do with it. And based on that info, you can see that their tax liability is going to increase based on those RMDs. This is just the cumulative amount of taxes. Um, whenever we’re doing financial planning, we’re just going to go through this real quick, but this is essentially what we can show you in the plan, but by doing the Roth conversion, you can see that red is just additional taxes paid earlier on before their RMDs come in. And then we can show you the gray, which represents less taxes they paid later on. in fact showing you how much less you’re spending in t or your how much less you’re paying in taxes and how much you can grow your portfolio by. Why is that? How do you grow your portfolio by doing a Roth conversion? I’m paying more money. I’m made my account value up smaller. If you have a $100,000 Roth and $100,000 traditional, which one’s worth more? Obviously, the Roth because it’s truly hundred grand. $100,000 traditional is Uncle Sam’s waiting to take his bite out. So, it might be worth more like 80 or 75. Same thing. Both are growing at 8%. Which one’s actually growing at 8%. Again, the Roth. Because part of those earnings that you have in this pre-tax account every year are eventually going to be Uncle Sam’s. So, by having Roth funds, by doing a Roth conversion, not only can you save money in taxes, use it as a legacy planning tool, can increase your portfolio because of tax-free growth.
All right. So, moving on to the surviving spouse spouse. In this hypothetical case, we see Adam and Ann’s income and assume they have $58,840 of ordinary income from IAS and or pensions and $60,000 retirement income. In their married filing joint tax status, they’d pay8 $8,841 in federal income tax. Now, if we look at this example with Ann filing as a single taxpayer, she would lose a social security check and need to withdraw $98,000, $99,000 in order to pay the increased taxes of $18,9345 and keep the after tax income the same. So, here the IRA withdrawal would increase 68% and the taxes would increase $ 114%. But while Adam was alive, they were in the 12% marginal tax bracket. And with Adam gone, Ann’s now in the 24% bracket. And we call this the widow’s penalty. You’re enjoying these file married filing jointly rates or basically just double of the single amount as far as the modified adjusted gross income goes. But when one of you goes, Uncle Sam doesn’t really give you any sympathy there. You’re now filing single and now you have RMDs on top of it, which they might have thrown you into the 22% bracket when you’re married, but now they threw you into the 32% tax bracket. We see it all the time.
But appropriate conversations before that first death could be a viable strategy to reduce, you know, for the surviving spouse and give him or her access income tax-free.
And this slide is demonstrating what it looks like when comparing tax brackets between married filing joint versus single. As you can see, the single filers tax brackets are compressed when compared to some married filing joint. One reason this is just very important is because after the first death, the surviving spouse often retains all the assets and the increasing RMDs as mentioned, but they’ll also be at a much higher tax rate compared to when they were married. And as a result, some of you may want to think about accelerating those IRA distributions or doing a Roth IRA conversion or maybe just taking more funds out of your tax-free account while you’re married and why you can take advantage of lower tax rates. And we’ll look at that a little closer in the surviving spouse section next to come as well.
Now, moving on to beneficiaries to finish this discussion. Let’s look at just a hypothetical example of Carrie here. She’s 45 years old. Assume she’s inherited a million dollars in form of a traditional IRA. We mentioned this earlier. This is a great example. She assume she inherited a traditional IRA from her mom who recently passed. She doesn’t need the money now and doesn’t want to increase her taxable income. Now, under the old rules, she could have stretched the withdrawals and would only need to take out a small R&D at 25K in the first year. But under the new rules, if she were to withdraw evenly over 10 years, she’d have to take $123,328 out each year. So, the old rule was preferable. You got to stretch it out over a longer period of time. In fact, many of you might have experienced these. Now, you have to get rid of it in 10 years. You have to distribute all the funds. More than likely, whenever you go, statistically speaking, I hope everyone on here lives be 120 plus, your children are probably going to be in their early in their peak earning years. So, as opposed to you converting funds at 12% 22%, your children might be make already in that 22 to 24% bracket, now their inheritance is taxed at 32% and 35%. Uncle Sam’s not spending your money wisely. I don’t care what side of the political spectrum you’re on. you know, they’re not spending your money wisely. Shouldn’t feel good that they’re your children are going to be spending 35% 32% on your hard-earned money.
So, in this hypothetical example, let’s look at the taxes on this inherited IRA, assuming that Carrie is single and she has taxable income of $90,000 a year. Without the inherited IRA distributions, she’s in that 22% bracket. But when she adds that $123,000 to her taxable income, she’s now up in the 24% tax bracket, as well as adding income in the 32% tax bracket, too. So, this is a simplistic example, but Carrie would pay over $310,000 in the inherited IRA over the 10 years on that distribution.
And one final hypothetical example to help illustrate things. Let’s assume mom and dad have an IRA that will most likely go to their son as a beneficiary and they’re thinking about converting 50k for the next 5 years or 50k a year over the next five years because they’re in the 12% bracket. Their son’s in that 24% bracket now and he’s likely going to stay there.
So in this example, we see that without the conversion, mom and dad will have access to more money than their beneficiaries because their tax bracket’s lower. If however, mom and dad do the conversions at their 12% tax bracket, their access remains the same, but the beneficiary values increase because that tax is paid in a lower bracket. And then after 10 years, the converted values for the beneficiary are about $56,000 more than the unconverted values. And then after 20 years, this increases to about 10 $110,000. But just two things to note. First, in this case, doing Roth IRA conversions did not reduce liquidity for the parents as indicated by the dotted red line and the conversion gold line. Second though, beneficiary received more because the taxes were paid at a lower tax bracket as indicated by that dotted orange line and the blue line.
So, two things to note. I’m sorry, but no, appropriate Roth IRA conversions before the owner’s death. They can be a viable strategy to help reduce the income taxes that the beneficiary must pay. Now, considerations of Roth IRA conversions. Again, no income limitations. Taxable at your ordinary income tax rate for that year. The deadline to do this too is also December 31st of the year. So many of you might conver uh contribute to your IRA come April the next year during tax season. Can’t do that here. Here you have to do it in the year that you convert. So if you make a conversion in April, it applies to that year. you want to make one for 2026, you have to do it by December 31st of this year. Again, there’s no pre-age 59 and a half additional taxes. And as we’ve mentioned previously, be be aware of unintended consequences of Roth IRA conversion. You know, increasing taxes, uh you could increase your social security taxes, you could increase your Medicare bracket. These are things to seek out help from a professional and see if this is actually worth your time in doing. And of course, these strategies aren’t for everybody. Now, as you can see here, and there’s no guarantee that a Roth conversion will achieve those intended results, but we can help you plan to see if it might be something up your alley.
Really, just a couple of slides to illustrate what our tool shows, how our tool can show you, hey, this was all orange ahead of time. There’s RMDs. We do a conversion. Boom. Now, you’re not being forced to take out more than you need in any given year. You can see how your assets would just continue to grow, etc., etc. so on and so forth.
All right, folks. In conclusion, we don’t know what our future tax rates will be. We know what they are today. We know that they are at a absolute low.
If this is something that you think would be worth it to you, again, we offer the help and the advice to do this. I just showed you our financial planning tool, some slides from it. We’re happy to run you through this to see if this is an appropriate strategy for you, if this is something that can assist you, if it’s a good legacy planning tool, if it’s a way for you to save taxes, if it’s a way for you to grow your assets, if you want to avoid RMDs, if you don’t need RMDs, we’re here to help with this. So, at no cost, at no obligation, it doesn’t cost anything. I still I get asked that even after saying it, but I’m going to repeat it again. We’re here to help you. So, if you’d like for us to do a financial plan, if you’d like to see if a Roth conversion is a good strategy for you, please click yes on this poll right here. We’ll schedule a meeting. Be happy to show you how we can help. We’re just grateful to have you as members. We’re here to assist our members. That’s why credit unions are better than banks. You are the owner of the credit union, not stockholders like it is for banks. you are the owner of this credit union. We’re here to assist. So, please click yes in the poll. You’re not going to offend me if you say no or not at this time. I would appreciate if everybody does answer the poll. That way, it shows that I kept your attention and that is one way that my boss measures me. I am currently in first place with the best retention rate or attention rate in the company. Um, so please help me look good. Click yes. No, not at this time. Doesn’t hurt my feelings. All right. And with that, we’ll start getting into some questions here. Go ahead and ask them. Chat, Q&A section. We have a couple of questions here already.
Let me start reading these to myself so I know what I’m actually talking about. But yeah, still have about 50 people who need to answer the poll. If you don’t mind answering, I would really appreciate that.
Okay. I have a concern about the Okay, I think this is something that we covered already, but I’ll just reiterate it and you probably don’t need me to answer this anymore, but have a concern about the increase adjusted gross income due to the IRA distribution. I assume you mean conversion. Won’t this increase my Medicare premium? It can. That’s why we need to do proper planning. We need to ask you all the questions. We need to understand what your income is going to be for that year. I love working in conjunction with your CPAs, too, because this helps me figure out the right number to convert. But that’s really what you do. It can throw you into another bracket. Sometimes it makes sense to go from bracket one to bracket two because of how much you can save. Generally speaking, not so often, but it it does make sense for about five of my clients were doing that where they’re going to jump brackets for about three years from ear because of how much more money they’ll save in taxes down the road.
Okay. How can I figure out myself if this conversion will be beneficial for me? Schedule a meeting with me or click yes right here and we will find that out together.
Isn’t it possible that the huge tax I may pay now in the conversion may not be much different than the smaller tax distribution with RMDs? But depends on your situation. Hey, how much money do you need right now? Are you being forced to take out more than you need? It also depends on your timetable. If you’re in your early 60s, it might make more sense than to do it whenever you’re already taking your RMDs. But again, that’s something that we can cover. Schedule a meeting with me. Don’t see poll, not in the app. Um, if it’s to schedule a yes poll with me, then please Oh, wait. Here.
Okay. If you would like to, if you don’t see the poll, that’s a problem we’ve had a few times. Schedule an appointment with me here. I’ll be sure to add you my numbers that way. If you don’t want to schedule one, you can just say it in the Q&A right there, but can’t see the poll. Didn’t want to schedule. I’ll let them know. Thank you. I appreciate that, too, folks. I really do.
Do you have to have earned income to make the conversion over to a Roth? No. To make a contribution to an IRA, you need to have income. To make a conversion, no income.
How are the funds insured? I don’t know what you mean by that, but if you’re talking about the funds that you have with the credit union, NCUA.
Okay. For those who said yes and you just didn’t get the poll, please schedule a meeting with me in that QR code. If I don’t hear from you, I’ll reach out to you via email.
It should come up. It might be hidden behind some of the other things in the brow. It might be hidden behind the browser. Thank you very much. I appreciate that. Uh I get hung up on having nondeductible IRA contributions mixed with traditional IRA funds and the pro router rules. If I want to convert to Roth, do I need to work with a CPA or financial consultant to sort this out? Work with both. You know, you’re at this time in life where CPA costs a couple hundred bucks and they can might pay their weight in gold, but doing a non-deductible IRA, that’s a contribution. That’s the backdoor Roth. So, if you are over the contribution limits with income or if you’re over the income limit to make a contribution to a traditional IRA or any IRA, you can do a backdoor one where it’s basically you make a contribution to a traditional account, a pre-tax account. You don’t deduct it. It’s converted to a Roth. It’s called a back door. It’s one way you’re able to get contribute to Roth uh IRA even over the income limit. It’s a simple process, too. But we can go over that again together. I’d be happy to schedule a meeting with me. QR code, email, click yes, whatever. Uh, we have about 15 more people that need to answer the poll. If you’re still with us, I’d appreciate that. If not, I understand. And I just hope everybody keeps joining. So, I appreciate everybody joining us today. It looks like that’s all the questions we have. Please bring bring more bring more questions. Don’t don’t be nervous. I’m here to answer them. I’m not going to charge anybody or send anybody a bill for a dollar for every question you ask. Please, we’re here to answer all of these. We’re kind of trying to differentiate ourselves from other We’re not trying, we are differentiating ourselves from other financial institutions by trying to go above and beyond for the members and offering these webinars and offering the services that we do. Apparently, nobody else does this, so we feel very special about ourselves. But please, any questions, we’re here to help with these. If you want to find out if a Roth conversion is good for you, if you want to find out if it’s not good for you, we can give you that answer. It’s a simple conversation.
No penalty. Even if it’s before the 5 years, there’s not necessarily a penalty. It’s just the Roth funds in there, not the earnings. If you start ear reaching into the earnings portion of it, then that’s where you might be taxed. But you’re more than likely not going to have to worry about that. I I’ve rarely seen that unless there was a serious life event while someone was in the middle of a Roth conversion. Um, you don’t need to worry about the five-year rule necessarily. It’s good to know though, and that’s a great question.
Okay, let me go back here.
Can the converted amount be withdrawn anytime the way contributions can? It’s the same thing 59 and a half fiveyear rule like I just mentioned, but after five years, you’re good. If you’re over 59 and a half, no penalties either. Can I contribute to my Roth IRA on a monthly basis? Of course, you can. You can contribute to it in whatever frequency you’d like. You can do all at the beginning of the year, all at the end of the year. You can put in, let’s see, $8,600 divided by 365 days of the year. You can put in $2356 every day of the year and contribute to your Roth if you’d like.
Are there better types of stock ETFs to do a conversion with? I would say to each their own for that question. That’s a great question, too, because generally speaking, hey, you’re doing a Roth conversion. You want these funds to these funds are taxfree while we’re converting. We’re also trying to draw down the pre-tax funds so there’s less of a pain to deal with later with RMDs. So, you’re more than likely not going to be reaching into your Roth funds after the conversion or really near that time because you still want to wait on that 5-year period. What does that mean? Means you can be a little bit more aggressive with your Roth funds. So, if you’re in retirement and you just want to be pretty conservative, go for a 3 to 5% return, great. But with your Roth funds, you know, 3 to 5% return on a pre-tax account. Remember, Uncle Sam’s getting his cut of those earnings. With the Roth though, you can go a little bit more aggressive. It’s kind of how I illustrate it most of the time, too. I’d like to show people that
if you convert to an existing Roth IR Oh, by the way, how’s it going? Long time. Good question. Okay. Um, if you convert to an existing Roth IRA that’s been open for more than five years, is there a restriction on withdrawal portion? Yeah, it’s the same thing. Just a five-year countdown happens with new funds. So, if you did a conver if you have a $300,000 Roth IRA and it’s been open for 10 years, but you want to convert 50,000 into it, the 50,000’s now on the five-year click on the fiveyear ticker there, fiveyear timer. the other 300,000 is going to be available, but still um you’re good in that case. It’s just you’re going to be reaching into the other funds first.
See, glad to hear.
Does the surviving spouse have to take the other spouse’s RMDs and his her arm? Yep. That’s what we’re referring to as the widow’s penalty. So, you lose the joint status and now you have both RMDs to deal with and you more than likely have the higher social security. So, you are you have money problems. Not not lack of money problems, but you got money problems or you’re going to have to worry about taxes, too. So, you do have to it’s as if it was all already your own IRA the entire time. So, the surviving spouse does have to take the other spouse’s RMDs once they pass.
All right, folks. I believe that is the end of it all right here. I have to get running. I am moving to a new spot down in Houston and I need to go meet with somebody about selling some of my old furniture. Look, if you ever have any questions, if you don’t want to do a consultation, that’s fine. We’re here to help. Like I mentioned, here’s my info. Send me an email with any additional questions if there was something that kept you up at night tonight. Here to assist you guys. Here to assist our members. For those that said yes, I will be in touch soon. I’ll probably send you an email and give you a phone call tomorrow. We’ll schedule a meeting at time convenient for you. Hope everyone has a wonderful day. Thank you very much. Take care. I’m glad it was helpful.