Good everyone. It’s now 2 minutes past the hour. I know for you folks on the East Coast it’s 7:00, so thank you. I know we’re going to we’re in dinner time right now, but try to get this one quickly done today, so everybody can get back to what they’re doing and hopefully you leave well, a little more knowledgeable and knowing more than you knew before today. So, good evening everyone. My name is Baptiste Bruner and I’m a Texas-based financial consultant with Reliant and part of a team of financial professionals. We have a team of professionals at the credit union, and we really just give a lot of educational webinars to just educate our members, help them understand how to retire better, maybe different things that they can come across in retirement as far as Medicare, Social Security, annuities, how to invest best. And I’m going to just start by thanking all of you for taking the time to learn more about Roth conversions today, how to potentially save a lot in taxes, and ways to give tax-free money to your heirs, and find out if you may be a potential candidate for a conversion. Uh presentation’s about an hour long. I will make it as quick as possible. There’s some parts where we can cut through a little quicker, and as always we’ll reserve time at the end to answer any questions you may have. And when that time comes, you can go ahead and ask your questions in the chat section. I’ll be sure to get to them. There’s both a chat and a Q&A section in here. So, whichever one you prefer, to each their own.
And we have to make a note of this now, but now that there’s AI note-takers, we just have to make it known, look at you. I can’t stop you guys from taking photos of anything on the screen today. I’m not going to be mad about that, but please, if you have an AI note-taker in here, please remove them. Uh this is proprietary information, I guess, and they just don’t want those AI note-takers in here, but please keep that guy out. Feel free to take photos. I can’t stop you. And coming up what, 2 weeks? Going to be doing another webinar here on designing your retirement income blueprint. That’s coming up Thursday, October 29th, 2 Central, 3 Eastern. Uh this one was okay. It really I’m going to change it up a bit to really go through maybe withdrawal strategies, different ways to create different incomes, etc., etc. But going to make this one a lot better. So join here, too, if you want to figure out, “Hey, how am I even going to source my retirement outside of social security and drawing from my IRA or 401k?” We’ll go through that here.
Then next, how to get rollover ready. If you have a 401k, you’re going to retire, how do you roll it over? Most people move their funds out of their 401k and put it into their IRA to have a much more expansive investment selection offered to them because at your 401k with your company, probably only have 20 25 different investments available to you. It’s an IRA, you have all the investments that are available throughout that firm. So it gives you better investment selection, possibly find ways to save more in fees, open yourself up to better diversification, you know, not trying to put all your eggs in one basket like in one spider fund or one index fund or one fixed income fund. These are things that we can discuss here. That’s going to be Tuesday, November 10th at 6 Central, 7 Eastern.
But of course, our team here at Alliant Retirement Investment Services, we’re focused on helping you, our members, understand the ins and outs of investing, you know, saving for retirement, and much more than that, of course. Go ahead and take a look at our website. That’s ARIS, A R I S, .alliantcreditunion.com. Throw in a slash for events to see our webinar schedule. It’s not just me, we have a whole team. So you’ll plenty of webinars going on throughout the week. We also have our podcast Invest Savvy, plethora of information to be learned there. That’s airusfcu.org/podcast. And we also have our website and our blog. There’s a resource center on there, a couple calculators. Look, I’ll leave this up here for another few seconds. Take a photo of the screen. There There are a lot more resources available to you through the credit union than you may know. Go check them out. It’s at no extra cost. We put these up here to help you guys, our members.
And you know, on that note,
there’s a lot of other ways that we can help you at the credit union aside from giving you an interest rate on a CD or holding on to your money for you or giving you a We do full-scale financial planning. We will help you figure out your estate planning, investment management, advanced planning, financial planning. We will help you figure out your investment selections. We are a team of dedicated financial consultants that are here to assist you, our members. Difference between credit unions and banks. Banks are owned by stockholders. Credit unions are owned by members. I E, you are part owner of this credit union. You’re my boss. I’m here to help my boss in this case. Let’s just think of it that way.
Couple of semantics and disclosures. We can go back if anybody really wants to see those or read through them. Let’s get into today’s topic. So if approached correctly, a Roth IRA conversion can be an effective strategy in an effort to keep as much after-tax or tax-free money as possible. And today we’re going to look at a few important issues that have to be considered if you want to consider a Roth IRA conversion. So, first, what are the basics behind a Roth IRA conversion? We’ll get into who the original owner of that IRA Roth IRA about that Roth IRA. We’ll talk about the surviving spouse of the Roth IRA owner. And then the different types of beneficiaries cuz there’s few different types of beneficiaries. Um and the different classification calls for different rules. We’re going to get into those. That’s where things are going to get a little busy and I might just break it down real quickly so everybody can get to dinner quicker.
But to start off, let’s just go with the basics. Sounds right. So, Roth IRA conversions may help some of you manage the taxes paid on IRA values and in the end, just end up keeping more of your money. And if the Roth IRA owner’s current tax rate is lower than the tax rate when withdrawals required, whether their RMD or the surviving spouse’s RMD, beneficiaries required distribution, etc. Roth IRA conversions will create an advantage even if the taxes are paid from the IRA itself.
And just be aware of some of the considerations of Roth IRA conversions. There’s no income limitations. You might not be able to contribute to an IRA right now or a Roth IRA right now because of your income. There that does not matter when it comes to a conversion. And let’s just get this one out of the way early, too. There are There’s a massive difference between contributing to an IRA and converting an IRA. Contributing to an IRA, you’re held down by your income limits. You can only contribute $8,600 a year if you’re over 50. That doesn’t apply here. You can convert as much as you want. If you have half a million dollars in a 401k or an IRA, you can contribute or you can convert all of it tomorrow. You shouldn’t. We’ll talk more about why you shouldn’t, but well, you can. So, there’s no income limits here. And it will be taxed at ordinary income tax rates. And the deadline is not come tax day, but you can contribute to your IRA for 2026 by April 2027, but that doesn’t apply here. So, the deadline for this one is December 31st of the year you’re in. There’s no pre-age 59 and 1/2 additional taxes. And just be aware, there can be unintended consequences of a Roth IRA. So, make sure that you work with a financial professional before going through one.
And forgive me, folks. I’m working with one screen today. My catalytic converter was stolen out of my truck, so I had to work from home.
Now, let’s look at a hypothetical example of someone over age 59 and 1/2 considering a Roth IRA conversion of $10,000. We’re going to assume that the marginal tax rate now is at 12%. The tax rate later when it’s taken out will be at 24%. Now, if this individual doesn’t complete a Roth IRA conversion and just continue to let the pre-tax money grow for another 10 years at a 5%per year return, 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’d have to pay 12%of the money in taxes and would have only $8,800 in in the Roth IRA. So, assuming annual growth of 5%per year for 10 years, they’d have $14,334 that they can access income tax free. Cuz the Roth IRA owners over age 59 and a half and they met that 5-year requirement. So, that’s potentially almost $2,000 more or about 16%more if they complete the Roth IRA conversion and pay the income tax now instead of keeping that pre-tax money in the retirement plan or IRA the traditional IRA and pay the income tax later when they withdraw that money.
And this chart can help clients understand how a Roth IRA conversion might help given various tax brackets both now and later. And we we don’t know what they’re going to be in the future. More than likely tax rates will go up in the future. So, right now is not a bad time to take advantage of it. But as you can see moving across the top is where you’ll find the current marginal tax bracket. And let’s just say it’s 12%. Now, if we move down from there, you can see how much a Roth IRA conversion might help. And later this money will be taxable at 24%. A Roth IRA conversion can help a client end up with a possible 15.8%with 15.8% more money than in after-tax income.
So, whenever a Roth IRA conversion is an option, you have to consider at least two tax scenarios. First one is how the future tax situation might play out with without a conversion. The second is how the conversion will impact today’s situation. You have to look at income taxes. You have to understand your Medicare premiums. And keep in mind if you are pulling enough money and you’re earning enough in your investments, might have another 3.8%tacked on to your taxes in your net investment income tax. That’s a sneaky one. It’s had the same limits on it, too, since 2013 when it was implemented. It’s been 200,000 single, 250,000 married. Hasn’t changed since even we know what inflation’s done since then. So, these are all pitfalls that you might fall into. Well, again, consider that we have lower taxes right now. We’ve had two tax bills in the past decade that have lowered taxes. They’re bound to go up eventually. So, consider that you could be paying 22%or 12%on a conversion today, whereas tomorrow those same tax brackets might go from 12 to 15 or 18 or from 22 back to 28 where they were.
Before we move into a few hypothetical examples, we should review the latest tax changes from the one big beautiful bill. Some provisions are permanent changes, you know, current tax rates effective after December 31st, 2025. There’s a higher standard deduction. There’s the elimination of the personal exemptions, so on and so forth. There are some temporary changes in there. Um there’s that senior bonus deduction, the salt tax deductions were increased. Uh car loan interest deduction as well, if you bought an all-American car, I think it really only applies to Tesla and maybe some foreign and Chevy models, but look into it if that maybe we look deeper into that one if you’re interested. There’s the tip deduction over time and those savings accounts as well.
But, it’s important for clients to watch for an opportunity to reduce the taxes paid on retirement. And reducing the amount of tax paid may mean more money for retirement expenses or for passing along to your beneficiaries if that’s what’s important to you. So, again, I encourage everybody to speak with a financial professional and a tax professional when looking into this and we can help look into a financial planning and see if this applies to you. We’d be happy to do that. But, in this case, we see how much ordinary income a married couple, both over age 65, they can absorb in the various tax brackets after the passage of that one big beautiful bill act. The standard deduction, the additional one big beautiful senior the senior deduction that’s added into there. There’s a phase out at 1.2. There’s a few more things in here.
Pardon me. But, the standard deduction 2026 is $32,200 when you’re married filing joint. Plus, if you’re over the age of 65, it’s $1,650 per person in addition to that per person. Plus, a $6,000 senior deduction per person. So, this adds up to a lot more. Your your standard deduction went from $32,200 to $47,500 if you fall within all the income limits there.
There is a special rule for Social Security recipients called the hold harmless rule. And that ensures that Social Security benefits will not decline from one year to the next because of increases in Medicare Part B premiums. And whether this rule comes into play in a particular year depends on the amount of COLA or cost-of-living adjustment and the Medicare Part B premium increases. And the hold harmless rule will apply in 2026 for those people who had been paying the standard Part B premium if their Medicare Part B was increased. But, the Social Security cost-of-living adjustment amount was not large enough to cover the full amount of their increased premium. And the hold harmless rule applies to a few Social Security recipients in 2026 except for those who pay more than the standard Part B premium amounts and including individuals turning 65 in 2026 and starting Medicare in 2026. So, individuals ages 65 and older who were not on Medicare in 2025, but starting Medicare in 2026. Individuals ages 65 and older on Medicare in 2025 but not yet receiving Social Security benefits.
And higher income Medicare beneficiaries are not held harmless and they have been paying more for their Medicare Part B and Part D coverage for several years in the form of income related monthly adjustment amounts. And the Medicare Access and CHIP Reauthorization Act back in 2015, otherwise known as the Doc Fix law, enacted new modified adjusted gross income tier brackets that went into effect starting with 2018 Medicare premiums. So, the 2024 tax return is used to set the 2026 income related monthly adjustment amount payments. That’s called IRMAA right there. Using the new tiered system to determine Medicare Part B premiums. These are all things we have to keep keep in consideration when doing a Roth conversion. Why? Cuz if you fall within just $1 into the next bracket, you’re paying a lot more for your Medicare. So, you might be wondering, why are we talking about Medicare during Roth conversion times? It’s because you have to keep in consideration your Social Security, your Medicare, and your federal and possible state income tax brackets when considering if you if a Roth conversion is right for you. It’s not just if your federal income tax brackets there are going to be a problem. It’s also your Medicare itself. All right. So, let’s move on to the original IRA owner. Now, since the RMD age is now increased to 73 if you were born before January 1st of 1960, at 75 more than likely for those who are born after in 1960 or later. It’s increased then. It may be tempting to just simply delay all IRA withdrawals until then. And while not everyone will be able to do this, those that can should be aware of rapidly growing distributions that might then move them into a much higher tax bracket. So, you can see that here in this chart. It’s just assuming that the initial IRA balance is at a age 65 and it earns 5%per year. If you’re not touching it, you see how much more it grows and the bigger your pre-tax position is, the more Uncle Sam’s going to force you to take out when you hit your required minimum distribution age at 73 or 75 or somewhere in between.
In this graph, it Pardon me. This graph illustrates the increase in RMD amounts when compared to inflation. And it assumes that the initial IRA balance is a million dollars at age 73 and it earns 5%a year. And 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, the RMD amount is increasing faster than inflation. It could push the taxpayer into a higher tax bracket. And if this seems likely, Roth conversions and other strategies should be examined closely as part of a drawdown strategy.
So, we’re going to move on to the surviving spouse here.
And in this hypothetical case, we see a couple married a married couple, they’re filing jointly. And assume they have $58,332 of ordinary income from IRAs and or pensions and $64,000 of Social Security retirement income. Well, in their married filing joint tax status, they pay $7,332 or $7,332 in federal income tax.
Now, if we look at the example at the same at this example with spouse A filing as a single taxpayer, they could lose a Social Security check and need to withdraw $101,451 to pay the increased taxes and keep the after-tax income the same. So, here the IRA withdrawal would increase 74%and the taxes would increase 152%. While spouse B was alive, they were in the 12%marginal tax bracket, and with spouse B now gone, A has now jumped into the 24%bracket. And if A increases IRA spouse A increases IRA withdrawals to keep the same after-tax income, they’ll need to withdraw 74%more and taxes would increase 152%. It’s something that we call the widow’s penalty or the survivor’s penalty. When you go from that column joint married married filing jointly to single, you’re going to jump tax brackets possibly. And one way to avoid that is a Roth conversion. You already paid the taxes on it. There’s no more RMDs, and all money you pull from that Roth is tax-free. So, no jumping tax brackets.
And overall, this leaves spouse A with an income reduction of $43,119. This type of dynamic change after the first death can reduce the surviving spouse’s probability of success. And if the first death came after a costly long-term care event, situation could possibly be even worse.
All right. So, moving the beneficiaries to finish our discussion with this part here.
So, there have been some rule changes. It happened a couple years back back in 2018. Let’s just look at a hypothetical example of Cammie here. She’s 45. Assume she just inherited a a dollars of a traditional IRA from her deceased mother. And she doesn’t need the money now and doesn’t want to increase her taxable income. But under the old rules, she could stretch the withdrawals and would only need to take $25,773 in RMDs in the first year.
But under the new rules, if she were to withdraw evenly over 10 years, she’d take out $123,328. Now, I don’t know if anybody has their tax brackets in front of them, but you definitely jumped a couple of them by just taking out these RMDs from your IRA but your beneficiary IRA. So, if you are looking to do a Roth conversion for estate planning purposes, take care of your spouse, that’s great. You’re going to make sure that she’s not going to jump that tax bracket. She’s not going to fall into this um widow’s penalty. And if you’re looking into it for your kids or other beneficiaries, let’s say that they’re doing well. They’re making six figures. Well, you could have probably converted a lot of your traditional funds that 12% or 22%tax rate, but now that your kids inherited it, they might be paying 32 and 35%instead. And now the funds that you were hoping to give to your children to take care of your grandchildren and for them to take care of themselves, Uncle Sam is smiling because he gets to take a whopping 1/3 plus of that inheritance because they’re now in a higher tax bracket and they have to withdraw everything over a 10-year period.
And in this next hypothetical example, let’s look at the taxes on this inherited IRA assuming Cammie is single and has taxable income of 90 grand a year. Without the inherited IRA distribution, Cammie is square in that 22%tax bracket.
But when Cammie adds $123,338, that inherited amount, to a taxable income, she’s now filling up the 24%tax bracket, as well as adding income in the 32%tax bracket, as I just mentioned. So, in this simplistic example, Cammie would pay about $322,000 on the inherited IRA over the 10-year over that 10-year period of that distribution. Whereas, keep in mind, if you were able to convert at 12%rate, you would have paid 1/3 the amount that your kids would have paid in that case.
So, here’s one more. Mom and Dad here, they have an IRA that will most likely go to their son as a beneficiary. And they’re thinking about converting 50 grand a year for the next 5 years in their 12%federal tax bracket. And their son is in a 12 24%bracket and will likely 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 is lower. If, however, Mom and Dad do the conversion at the 12%tax bracket, their access remains the same, but the beneficiaries’values has then increased cuz the tax was paid in a lower bracket. And after 10 years, the converted values for the beneficiary are about $56,000 more than the uncover unconverted values. And after 20 years, this increases to about $110,000.
And let me make another point here, folks. When your kids inherit your pre-tax funds and they have to withdraw it, let’s say you tell them, “Look, you have to pull it out over 10 years. Don’t spend it. Be wise with it. Reinvest it.” Great. They reinvest it. They put it in a brokerage account, which is essentially their only option, and it grows, they still have to pay taxes on capital gains on the funds that are growing. And [snorts] it’s not a retirement account anymore, it’s in a brokerage account. Whereas, if you put it in a Roth conversion, and like Cammy, who doesn’t need it in her in this situation, you can just let it sit there, grow tax-free forever, and if your kids don’t need it, well, they can give it to your grandkids. And now you just created generational wealth by just doing a couple of conversions through a couple of years over a period of time. And you have all this tax-free money that gets to grow tax-free, be withdrawn tax-free. It’s an incredible estate planning tool, on top of being a way to have tax-free money for yourself while you’re still here with us.
And another thing that we can talk about, let’s talk about how you could potentially use an annuity might help you hedge tax risks.
So, there’s plenty of them out there that can help you provide a reliable source of income to cover essential expenses to help meet your long-term retirement goals. And annuities offer tax-deferred growth potential if you’re using pre-tax dollars. And they also offer a death benefit during the accumulation phase, sometimes during the income phase at certain periods, and but they also offer a guaranteed income stream of income at retirement. And they can also help supplement your Social Security income allowing the rest of the portfolio to add value elsewhere. This is one thing that I do a lot with my current clients. We see where the current where they are, what are your income streams? You have a pension, you have Social Security, and that covers about 70-75%of what you need, and you have plenty of money sitting around in your IRA and in your other 401(k)s and other investment accounts. Well, if you were able to fill in your income gap to where all you have to do is just go to the mail for the rest of your life to grab your annuity check, your pension check, and your social security check, well, then the rest of your funds get to just keep growing. If we’re looking at this from an estate planning need. But, on top of that, you can use those funds that are still sitting in your investments, your income’s covered, the other 75%of your income is still invested, and now you can sit back and just convert those funds, turn it into tax-free money while living off of your other income streams that you’ve created.
And this is a different version of the Roth conversions webinar today. I did another one that was a little bit lengthier a few weeks back. We can talk more about it in depth in a one-on-one. So, the fact we are at the end, folks. But, today we discussed the basics of Roth IRA conversions, the original IRA owner, the surviving spouse, and the beneficiaries.
And again, this is what we do here at at Alliant. We’re here to assist our members, teach you more about how Roth conversions work, how investments work, what you should do better to plan for retirement. Heck, I just got off the phone with someone before this, and they thought they’d have to work seven or eight more years, and they can retire tomorrow if they wanted to. Have a financial plan created. We do it at no cost. We’re here to assist our members. We also offer, for those that do investments with us and do become clients within the credit union, not members, but become clients as far as investment strategies go, we offer an estate planning tool here as well. It’s called Trust&Will, trustandwill.com. It’s at no cost to our clients. If you need a will done, a trust, power of attorney, any kind of legal documents, we can give you access to that to assist you, so you can sleep better at night, knowing that if anything were to happen to you, your estate’s taken care of. Here’s my ugly mug right here. I am down 50 lb since then, so please don’t judge that photo. I need to get a new one done. I’m going to send out a poll here. If you want to learn how Roth conversions work better, if you want to see if you’re a good candidate for it, go ahead and answer this poll. If you want to say no, that’s fine. It’s not going to hurt my feelings, but if everybody could answer the poll, I would truly appreciate it. Just makes me look good with the boss that hey, everybody stuck around and answered the poll. Please go ahead and answer that. But look, one thing we’ll do is financial planning. We’ll look into seeing if a Roth conversion is a good strategy for you. But on top of that, we’ll show you how much money you can save in taxes and how much more you can grow your accounts by turning it into tax-free rather than keeping it pre-tax. Our software is fantastic. It It shows everything. It’s some of the most sophisticated financial planning software I’ve seen and I’ve been in the industry for 10 years. So, please let us know how we can help there. If everybody could answer the poll, truly would appreciate it. Let’s start off with some questions here. Uh I’ll start pulling those up here in just a second.
All right. Some about 10 more people need to answer the poll. Please get to that if you don’t mind. I do appreciate it. Again, not going to be offended if you say no or not at this time. If you say yes, to those who did say yes and I look forward to meeting with all of you, I will send you an email hopefully by tonight, if not tomorrow, and I’ll follow up with a phone call. But I’m here to assist all of our members. All right. And with that, there’s two areas. There’s the Q&A section and there’s the chat section. Let’s get into some questions here, folks.
How many times can I convert to Roth per year and lifetime? As much as you want. As mentioned earlier, you can convert as much as you want. Is there an upper limit of age to convert? There is not. You can convert as much as you want in a year. You can do it when you’re 90. you can do it today if you’re 50. There’s no problem. There’s no 10%early withdrawal penalty from a conversion either. Thing is is that you might think, okay, well, I’m going to put every and and we already covered this, but I’m going to say it again. If you have $100,000 that you want to convert, maybe it is good to depending on who you are and what you want to do and what your goals are. Everybody’s different. There’s no cookie-cutter strategy. But you might not want to do that. If you’re making $100,000 and you’re going to jump the next tax bracket after 20,000 more, maybe just fill that bucket and convert 20,000 that year. If you’re going to retire at 65 and you have till 75 until RMDs kick in, you have 10 years to convert a lot easier. Now, you can still convert even after you’ve hit your required minimum distribution age. It just makes it a little bit harder cuz you have to pull funds already. So, it’s best to really do it. That sweet spot when to start converting is during lower earning years. If you’re a business owner and you’re having unusually low sales, if you took a year off from work, but really it’s those years between retirement and your RMDs is when we can really do some work. And heck, it might make some sense to do a little conversions to try to get some of it out of the way while you’re still working. It comes from a self-assessment and I will help you with that. You just have to reach out. There’s the Q&A code or there’s that QR code over there. I’m sorry. Again, I’m working with two screens, so I don’t have a few things up on here. I hope there’s no gray boxes in the way. Um but feel free to email me. I’m a resource here to you. If you are sitting around at work and something comes to mind about finances, shoot me an email. You are a member of this credit union. I will respond to you as promptly as I do my own boss cuz you guys own this place.
Can you explain the five-year rule? I would be happy to. So, with a Roth IRA, let’s say even for myself, once you hit 59 and a half, you can pull funds from your from your Roth, no problem. But, they have this five-year rule on there to where I’m 36. If I opened [clears throat] up my Roth when I was 25 and I put 20 grand in it then and I haven’t contributed anything else, I can pull money out of it, but the earnings will be taxed if I take out within five years. But, after five years, all those funds that have been in there for five plus years, I could withdraw at 36 tax-free right now. I’m not going to cuz I’m going to save them for retirement and I want to buy a boat tax-free one day. But, there’s that five-year rule. I hope that explained it.
Ooh, good question. I know how to see the fed federal tax brackets. How can I find the Medicare and other hits by converting? Okay. One, schedule a meeting with me because I keep all of those brackets on my screen all day so I can run through them with clients and members. But, Humana has a really good um graph on their website. So, if you just type in Google right now, Humana, the medical uh the insurance company, Humana Irma brackets, Irma is I R M A A, igloo, rhino, May, April, April, it’s right there. Very easy. The one thing to know, though, Medicare Irma brackets are not marginal brackets. Federal tax brackets are marginal. So, the first 10 grand you make is taxed at 10%, then the next thousand few thousand dollars you make is taxed at 12, and anything you make outside of that bracket is then taxed at 22 and so on and so forth. With Irma and Medicare, it’s $109,000 is the limit for single, 218 joint is the lowest bracket. Anything below that, you’re paying the cheapest amount of Medicare. But, if you make 109 and $1 single or 218 and $1 joint, you’re in the next bracket. So, that’s why it’s really important to work with a financial professional whenever you’re considering doing a Roth conversion cuz you surely do not want to throw yourself into another Irma bracket unnecessarily because you wanted to convert a couple extra bucks more. That’s why you work with a team of with a financial consultant and with a CPA whenever you’re doing this.
I think I already answered this, but we’re going to go over it again anyway. If you’re already taking RMDs, can you convert the RMD into a Roth or would those be separate transactions, a Roth conversion amount and an RMD amount? Correct. You can’t in that case. Whatever you take out, you’re already going to be paying taxes on anyway, and you can’t really double dip it. They’re going to be watching for that. So, you can’t just take that out and then move it over. You have to pay the taxes on that, and you’re done in that case. But, you can convert while you’re already taking RMDs. If they’re telling you you have to take out 20 grand this year, but you want to convert 30, and it makes sense from a financial standpoint after running some analysis, making sure you’re not going to be thrown into another Medicare bracket, federal tax bracket, and the taxes are not going to be a massive hit, these are all things we can cover. I’d be happy to show you that one, too. Send me an email.
This is a long question, but you give me a second here. I like this one so far.
Um I’m just going to say your first name. I don’t want to announce it, but Kathy said of a meeting with me, let’s go into this one in further depth. So, these questions, unfortunately, I can’t go into everybody’s specific situation in a [clears throat] public forum. Um, but this is an interesting case here. So, uh, doesn’t have to great pension, doesn’t need to touch their IRA or their Roth IRAs. Uh, they’ll be done converting next year. They have one account that’s a pre-tax that’s an could be income in the future. They have a brokerage account, which they can’t convert. It’s non-qualified money. But, they’re thinking of not renewing an annuity when it comes due and if it’s a good strategy or not. And it could be, but maybe not. There’s a lot of things you have to consider here cuz it sounds like that annuity is going to be taxable funds. And you have 230, depending on how long you have it. That that could be some great income that you have. I mean, not all of us are going to avoid taxes completely. Okay, so annuity is going to be taxable. It’s pre-tax money. I’d want to run analysis on that. I’d like to know what your social securities are, what your incomes are, how much you need in a given year. And we go from there because if you’re going to be done converting next year, and then technically you just have $230,000 more to convert once that annuity is out of surrender, maybe it doesn’t make sense to to turn it into income or let it sit there and continuously grow into a pre-tax issue. Where it goes from 230 to 500k over a you know, seven or eight-year period. And now it’s 500k that your RMDs are based off of rather than nothing because you converted that 230 rather than let it sit there and grow. I’d be happy to go through that one with you though. Let’s do a let’s do a financial planning meeting, but I I I don’t mind it. Let’s just see that one though.
No, you you you can’t though. That’s the thing. That like they’re not going to just say, “Well, you paid taxes on it for your RMD and you can’t switch it around like that.” It it It’s a logical thought. It absolutely is, but it can’t work that way. Great. Look forward to meeting with you, too. Should I pay taxes out of converted funds? Most of the time that is folks’ only option. But if you have nice chunk of change sitting in a bank account or CD, you want to typically pay tax rule of thumb. And I’ll show you in in financial planning what makes most sense for you. Cuz you should have cash. If you’re expecting to pay 100 grand in taxes over a 5-year period of converting and you have 100 grand, generally speaking, it makes sense to use that cash to pay for those taxes. That will help you out the most rather than dwindling your IRA more. So, if you wanted to convert 100 grand, then let’s just say you had to pay 20 grand in taxes on it, well, then you have to pull not just 120 grand out, you have to pull 125. Cuz now you have to pull out tax money, that 20 grand on the 100, but now you have to pull out additional five to pay the taxes on the additional 20. See how it adds up there? But sometimes that’s folks’only only option. Not everybody has six figures of money sitting around to pay tax bills with. [snorts] If you do, generally it makes sense. But sometimes it doesn’t because, well, it’s good to have cash. Cash is still king, even though it’s losing 4 to 5 to 6%in value every year in inflation. Cash is still king. It’s always good to have some cash. So, I appreciate that question. That’s a great one right there. It depends on the person, like most of my answers to these questions and my apologies for that. It comes down to learning more about you and I can give you a more informed decision advice. But I can help you out with that one, too. But generally speaking, it makes sense to pay it with cash on hand rather than reaching deeper and deeper into your IRA to pay tax bills. But you can still do it. You can still pay tax bills with funds from your pre-tax account on top of that.
I am not yet in my late 50s, but based on your experience, when should I be having a meeting with an advisor? Everybody should be meeting with an advisor. Everybody should have an advisor. Unless you’re already I mean, I’m an advisor and I have an advisor. You know, it takes my personal sentiment out of it though and I have somebody else my colleague looking over it for me. Everybody should have an advisor. Most important reason why is think about what happened in 2020. And I have [clears throat] a lot of good stories and a lot of bad stories, too, about it. But people were saw the the cliff falling, COVID, the sky’s falling, the world’s ending, the Dow and the S&P and the Nasdaq are down 30 and everybody’s selling. If you sold and you didn’t get back in, you would have been down 30%in the year and you would have missed out on about another 50%in growth in just that year alone. The from the dip to where we ended in 2020 was about a 50%growth. About more than that to be honest with you. You want an advisor to talk you off the ledge, but to also show you more than what’s just out more than what’s available to you in your 401k or your IRA or just basic S&P spider funds. I don’t get me wrong. I love my S&P index funds. I really do. But there’s so many more options out there that you can only find or only through you can only purchase through an advisor. Like I love structured notes. They’re CDs that track the S&P and have 100%downside protection and are fully FDIC insured and they don’t cost anything. I love them. I love them for long-term money. I love using them for Roth funds, too, cuz now, okay, you have all this tax-free money. 100%protected, tracks the S&P futures. In fact, it actually does 20%better than the S&P futures right now. So, always meet with an advisor. Learn what’s out there. There’s no problem with being educated further and further. Meet with more than one, too. I mean, everybody has their own different Everybody in this practice uh has different ways of doing things. Find one that you can trust. Find one that you like, one that you can handle, one you can deal with. Keep in mind, you know, you’re putting a lot of trust in this person. Interview.
If married, filing jointly in the 22% tax bracket, still working, does it make sense to convert or wait until one or both retire? That’s a great question. And there’s a lot of There’s a lot of space between that 22%bracket. But also, what is 22 to 24? Cuz that’s the next bracket. So, if you’re in the 12, converting into the 22 doesn’t make sense cuz you’re going, you know, you’re increasing your taxes by about 45%going from 12 to 22. And then, if you’re in the 24, it doesn’t really make sense to jump all the way up to the 32 cuz that’s another 30%increase in taxes. This is where things are going to probably change whenever they hike taxes in the future, 22 and 24%cuz they’re really close together. It makes sense in some scenarios to fill your 22%bracket and convert some in the 24 because it’s 2%more. It makes sense in some cases. And again, I can show you if it makes sense for you by just doing a financial plan. It’s not the hard to do. Most fun part of this job is what I’m doing right now, presenting to you guys. My second favorite part of this job is making financial plans. Don’t mean to come off like a nerd like that, but I really do like making them and showing people you can retire early, you can save this much money in taxes, you can grow your portfolio by this much, you can fill in your income gap. I love doing that. So, please make my day better, schedule a meeting with me, and we’ll see if it makes sense to convert or not. You might not be a candidate at all. You might be a perfect candidate. I’d be happy to show you that.
Okay. Great question here. Is there a financial formula or a website that I can visit to determine the what my RMDs will be given my current financial state? So, first you’re going to need the crystal ball that tells you what your account’s actually going to be worth whenever that day comes. But, you can find out essentially what it would You can find out what it would be should you have RMDs this year starting. And it’s just called the mortality table. It’s on the IRS’s website. If you type in mortality table for 2026, it changes every year. But, all you do is you take your final value from Dece- if you were trying to calculate your RMDs for this year, you base it off of last year. So, your final statement from your accounts from last year, December 31st, 2025, you’re going to take that final total on that year, divide it by the mortality table uh rate that they put in there based on your age. So, I think it’d be like 28.3 if you’re 75. Divide your total by 28.3, there’s your RMD for the year. It’s pretty simple and straightforward. If you need help with it, again, there’s all my information. Send me an email. We can review your If you just want to show like send me your rough balance amounts, I could tell you what they would be. If you’re 5, 6, 7 years out from RMDs, let’s go ahead and make a hypothetical and just say, “Okay, you had a half a You have a half a million dollars. Let’s assume 7%growth over the next 7 years. It would be X amount. X amount turns into this.” But also, our financial planning software shows that, too. We go ahead and it breaks everything down. It shows you what your RMDs should be in the future, what you could expect them to be based on certain assumed growth rates, too.
Paying the taxes out of the new year sounds great. Okay, Kathy, I look forward to meeting with you about that one, too. Is it a good idea to convert some of the traditional IRA into a Roth IRA? I’m still working and I’m about 10 years before I retire. It can be. And I said this earlier, so forgive me, everybody, but it can be beneficial to start now. It depends on what tax bracket you’re in right now. So, if you’re in the 12%and you got plenty of room before the 22, yeah. And even if it is only 10, 15, 20 grand that you convert before jumping tax brackets, and we’re avoiding jumping tax brackets, it makes sense. Why not? Get it out of the way. You’re 10 years before you retire, that’s 10 more years of your funds growing tax-free. You know, whenever we’re looking at two different accounts, and we have 100,000 in a Roth IRA and 100,000 in a traditional, which one’s worth more? And it’s the Roth, cuz it’s truly $100,000 tax-free money, whereas this traditional is anywhere from $90,000 to $70,000 in truth because of the taxes that’ll be taken out. And on the flip side, we had 5%growth on this Roth or 5% growth in this traditional, well, the Roth actually had 5%growth cuz it’s 5%tax-free growth. Whereas the traditional, you’re going to really get 3 and 1/2, 4%of that growth cuz Uncle Sam’s going to take his 20%. He’s going to take his cut.
Do more Roth contributions though. Uh that’s what I and that’s a general rule that I’ll tell you, but I I really would like to meet with you to give you a better answer and just show you what might be best. That’s what I can do for you though. I’d be happy to help.
Well, that’s great. Good, I’m glad you manage your own accounts. It sounds like you do. You’ve done all your conversions and everything yourself. That’s great. Well, all right, folks. Doesn’t look like we have any other questions today. Promise to get everybody back for dinner. Uh we got 10 more minutes to go. So, listen, I’m going to stick on here for about 2 more minutes. If there’s any other questions, we’ll get to it. But other than that, join me for my upcoming webinars. We’re going to go over income stuff. Yeah, a couple of weeks. We’re going to review incomes. Check out our other webinars. But look, we are a resource here to you through the credit union. This is how we try to establish ourselves differently from our competition. We like to educate our members. We’re here to assist you guys. We appreciate you doing your doing business with us. We truly do. So, thank you all very much for joining us today. I hope you have a wonderful day. Um gen- more than likely everybody in here is from either Texas or Florida or somewhere in the East Coast or somewhere in between. Thank God we’re getting better weather, right? So, everyone enjoy it. There’s a cool front coming through. Enjoy it. Enjoy your time with your family. Have a great dinner tonight. Thank you all very much. Thank you all very much for the kind words in here, too. I’m looking forward to meeting with you. And if we do set up a meeting, just come as well prepared as possible. Have a good idea of your financial positions, what you have, Roth IRA, traditional 401k. Understand your balances. Bring your Social security statements. That’s important. Got to factor that in there. Spend those Social Security dollars first before you reach into anything else. So, we’ll go through that. Thank you, everyone. Have a wonderful day. And again, I’ll stick back for any other questions. I’m glad. Thank you very much, Mike.
Of course, thank you.
Are there charges for your services if we meet with you to talk about these things? No. It’s no cost financial planning. We are here to assist you guys. Now, we’re going to show you some solutions and if you want to go through with them, we might get paid. You know, it might be at a charge. And that generally comes from managed money, which is like what everybody’s kind of going towards these days. Like Fisher Investments love to say, we do better when you do better, which really just means we make you more money so we can charge you more. I don’t fall for that rap fee lingo, where give me a million dollars, I’m going to put a 1%fee on all of your money and charge you that every year. As you grow, I get to make more money off of you. I find that terrible. It’s just a strategy that has been marketed to everyone recently and that’s the new norm is managed money. I don’t like to use it all that much. I do need to use it because everybody needs to have liquid money. People should have some managed money, but putting everything into managed, no. Because it’s just as prone and susceptible to market upturns and downturns. Say I put you in some managed accounts that track the S&P. S&P goes up, you go up, but when the S&P goes down, you go down. I like to use a lot of no fee products with downside protection. Uh back to structured notes like I mentioned. That saves my clients a fortune. An absolute fortune. And it’s what’s right. If I can use products that I don’t have to charge for money for, I use them. And I make sure that we have everything split up right to where you never have to worry about liquidity purpose liquidity needs either. So, where we can save you money, we will save you money. We’re not doing no fee products in that case. But I’d be happy to show you how all that works, too. Really interesting products that not a whole lot of people use right now. Just they don’t make as much money off of it. That’s why a lot of other financial advisors don’t use them. So, it’s sad how it works out though. But you know, as Saint Thomas once said, greed is what money is the epitome of all evil. And here I am in the financial services industry. So,
All right, folks. Well, I’m going to hop off now. Everyone have a wonderful evening. Thank you again.