Transcript
00:00:00:05 – 00:00:23:05
Mike
Should you convert IRA or for one k money to Roth? Or should you not? And if you should, should you do it now? Should you do it later? My goal today is to give you some guidelines. So just general guidelines to help you focus on moving in a positive direction one way or another. But before I do that, remember, taxes are different for everyone.
00:00:23:06 – 00:00:48:01
Mike
The tax code is unfortunately very complex and it can lead to some strange outcomes when you take the same strategy and apply it to different people. Should you do Roth conversions or not? I have a very simple framework to share with you to help answer that question. Let’s imagine a simple cross here, and this is really a matrix.
00:00:48:11 – 00:01:18:08
Mike
And we’re going to compare two moving parts here. So first is going to be time. On this side is two day and on this side is tomorrow. Here’s where we are on the left today and over on the right, down the row. And tomorrow might be after retirement is when it usually is in this discussion, but not always.
00:01:18:11 – 00:01:50:28
Mike
Here’s the other thing. The other axis that we need to look at, low tax brackets and high tax brackets. Let’s go ahead and take a look at how we would use this matrix to determine whether or not you should do Roth conversions. Let’s imagine that you’re going to be in a low tax bracket both today. Let’s say you’re in a low tax bracket today and you’re going to be in a low tax bracket tomorrow.
00:01:50:28 – 00:02:24:16
Mike
So we’re like, wow, low taxes plus. Plus, we probably don’t want to do any Roth conversions because doing a Roth conversion today might put you in a higher tax bracket. But if you’re just trying to avoid a low tax bracket later on, well, then what good did you do yourself? If you have a large IRA, let’s say your IRA or your form in case like $1,000,000, you might be thinking, Oh, I’m going to be in a low bracket today and a low bracket tomorrow.
00:02:24:17 – 00:02:49:09
Mike
I’m cool. Not so fast, because that brings up a situation number two. What if you’re in a low tax bracket today? You think you’re going to be in a low tax bracket when you’re retired. But because your IRA is so big, the required distributions are actually going to put you up here. You’re like, oh, I’m in a low tax bracket today down here.
00:02:49:09 – 00:03:13:07
Mike
Yeah, but I’m going to be in a high tax bracket when I retire because my stupid required minimum distributions are going to put me there. Yes, you should do. Or at least look at doing Roth conversions in that example. And in that example, you’re probably in a position where you should be thinking about filling up either the 22% bracket.
00:03:13:22 – 00:03:38:00
Mike
I would even encourage you to be open minded to getting a little more aggressive in filling up the 24% brackets. Well, what if you’re up here in this zone? You’re in a high tax bracket today and you do the math and you say, oh, my gosh, good news. When I retire, I’m going to be moving to a much lower tax bracket.
00:03:38:00 – 00:03:56:18
Mike
So I’ve got this situation all the time where you’ve got a couple they’re working there in their late fifties, early sixties, are making tons of money, like a couple hundred grand a year each. They’re making like 400,000 a year yet, and they’ve paid off all their debt. By the time they retire, they’re only going to live on maybe 100,000 a year.
00:03:56:19 – 00:04:21:00
Mike
150, a fraction of what they’re getting now. Their tax brackets definitely going to go down in retirement. And let’s imagine further that they do not have big IRAs or farro in case that would cause them to bump into higher tax brackets again in retirement. So we know they’re going to be in lower tax brackets in retirement if that is the case.
00:04:21:01 – 00:04:46:00
Mike
So they’re here today, but they’re moving down to here in retirement. Then we’re going to say, no, do not do Roth conversions right now. Our last scenario is we said, oh, we’re up here right? High tech, you know, we’re in big tax bracket today and oh, my goodness, we are likely going to stay in a high tax bracket in retirement.
00:04:46:00 – 00:05:19:19
Mike
We’re going to be high tax bracket today and high tax bracket in retirement. If that’s the situation. Yes, you should look at doing conversions. And guess what? You’re the unique individual that should consider the amount. Put it right here. All at once. Approach. You’re the person that should look at just converting all of it now and it’s going to stay because you got to write this huge check to the IRS to do it.
00:05:19:27 – 00:05:39:00
Mike
Or if you’re over the age of 59 and a half, you can withhold the tax, which makes a little easier. But if you’re a person, you’re in a high tax bracket today, you’re going to be high tax brackets later in life. I’m sorry, but here’s the deal. You will never pay less tax on your retirement account than right now.
00:05:39:00 – 00:05:55:16
Mike
And if you’re going to be in a high tax bracket both today and later on, you’re going to be exposed to those tax brackets. They’re getting higher and higher and higher and higher. And your retirement accounts are going to be fully exposed to those brackets getting higher, higher, higher, higher. Just getting the IRS out of your life now.
00:05:55:16 – 00:06:17:28
Mike
Just say, okay, get out of here. Pay it all now so that I don’t have to deal with it later can make a lot of sense. In fact, I’ve seen situations where it even makes sense, where by paying it all. Now that takes you from a high tax bracket in retirement up here and actually drives you down here to a really low tax bracket for the rest of your life.
00:06:17:28 – 00:06:56:13
Mike
So that could be a really good approach for you. Is your tax situation different from your neighbors and everybody else’s? It is. These are guidelines. They are not set in stone. Talk to a tax planning professional, someone that acts as a planning professional before you do anything. Hope this helps. That’s our message this week. Talk to you again soon.
