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Transcript

Zach:

Welcome to Retirement Today. I’m your cohost, Zach Holcomb, and alongside me we have Michael Reese, founder and president of Centennial Advisors, headquartered right here in beautiful Austin, Texas. Mike. We’ve got a great show on our hands this evening, but first of all, how are you today?

Mike:

I’m doing, I’m always doing awesome. You know that I’m just generally a happy guy, except for we’re going to talk about taxes again today, but that doesn’t make me happy, but you know, generally a pretty happy guy

Zach:

I always ask, cause if you’re having that one bad day, I just want to make fun of you for it. That’s the only reason I asked, but Hey, we have a great show on our hands today. Now we’re going to talk a lot about taxes. That’s a frequent topic on our program. If you’re a listener, but today’s show we have a great question that we’re going to be answering. It may seem like a simple question, but it’s a big one and there’s a lot we have to cover on it. Now, Mike, we’re going to be talking a lot about when should you do a Roth conversion or a big Roth conversion? When’s the right time?

Mike:

Yeah, not necessarily just a regular, like, yeah, probably the most common question I get. When I talk, you know, as you’re listening, you know, you call up the show and you say, Hey, I want to talk to you Mike, or maybe one of your team. Far and away, the most common question we get is how much should we do? We know we should do a Roth conversion, but how much should we do in a Roth conversion each year. And that’s a common topic, but one of the questions that I think that we need to talk about is when you do that huge Roth conversion. And so I have this little rule, right? Is I call it the rule of threes. Do you know what that is? The rule of threes?

Zach:

Tell me about these rules.

Mike:

Okay. Mike’s rule of threes. Okay. When I come across the same question, at least three times, then I say, all right, I guess I better talk about it on the radio show.

Zach:

Pretty sure you’ve come across this question. Probably 30,000.

Mike:

It’s come across a lot more. Yeah, but it’s the big, so this all started. I had a gentleman in our office, real nice guy. Right. And he has $3 million in his 401k.

Zach:

He’s done a great job.

Mike:

You know, I know what you’re thinking. You’re thinking I want to be that guy. Right.

Zach:

Right. Definitely.

Mike:

And, and so he was trying to figure out, well, what would a Roth conversion schedule look like when we did the math, in his case, here’s what his schedule should look like. And this is what I told him. You need to convert it. All of it now, like not bits and pieces, all of it, now. Can you imagine that, like being told, Hey, you’ve got 3 million in your 401k. You need to convert all of it now to Roth. Because when you convert from a 401k or an IRA to a Roth, what’s happening? You’re moving from an account where you’re going to pay tax on it later, to an account. That’s going to be tax-free for the rest of your life. But in order to make that transition, you’ve got to pay tax on the amount you convert.

Zach:

Right. So in his case, it was just ripping the bandaid off.

Mike:

Talking like a million dollar tax bill.

Zach:

Pay it all now.

Mike:

Right. So we want to talk about that tonight. And you know, when you do something like that, how do you know that it’s a right time to do a large Roth conversion? I had another case, a very, you know, super nice guy. I was talking to. Between he and his spouse, they’ve got about a million and a half. And in their case, the answer was not do it all this year. You know what the answer was, do all of his this year, do all of hers next year. Right. That was the right answer. And again, that’s kind of counter intuitive. You’re like, well, why would I do these huge Roth conversions now pay a boatload of taxes now, like, how does this benefit me in the long run?

Mike:

You know? So how do I know that that’s the right move versus doing it in bits and pieces? You know, because traditional thinking is you should do Roth conversions in bits and pieces. Not all at once yet. Here’s reality. Sometimes when you have larger retirement plans, like larger 401ks, larger IRAs, it does make sense to do it all at once. Had another, the third one that happened, another person comes in and they’ve got two and a half million in their 401k, same kind of thing. Right? When should we be doing it’s so funny, it’s like, I know I need to be doing Roth conversions. That’s exactly what-, let’s call him Jack. Mike, I know I’ve got to be doing Roth conversions, but I can’t get anybody to help me do the math to figure out how much I should do each year. We did the math and in his case, again, just do it all at once.

Mike:

And you know, man, his comments like, oh my gosh, why do I want to give all that tax money to he IRS right now? You know what my response was, it was, well, why do you care? It’s not your money anyway. You’re just giving the IRS their own money. Right? It’s not your money. It’s their money.

New Speaker:

People don’t see it that way though.

New Speaker:

So this is what we really want to dive into tonight. So I think what I want to talk about tonight is you want to talk about what is reality when you’re looking at your accounts. So mistake number one, probably the biggest mistake I see over and over again that people make when it comes to tax planning, especially with their IRA. So if, when you think about this, this is the number one mistake. You look at your IRA statements. So let’s say you get your statement from fidelity these days, you don’t get statements, right?

Zach:

All online.

Mike:

No, no, no. It’s all online. So you go online, right? And your fidelity say, or Vanguard. So you go online to fidelity or Vanguard or wherever your money is and, or your 401k. It doesn’t matter. You go online and it shows you your balance. And it says, oh, you’ve got a million dollars. You have 500,000, you have 200,000, you have 2 million. It doesn’t matter. You’ve got whatever your balance is. And immediately this is a mistake right here. You see that number and you immediately think to yourself, oh, I’ve got a million dollars in my 401k at Fidelity.

Zach:

Sure, it says a million dollars on the paper.

Mike:

And it’s got your name on it. It says your name, it’s your account. And the balance is a million dollars and it’s an IRA or a 401k or a 403b. This is right there, mistake number one. Biggest mistake that people make over and over and over.

Mike:

And this is what if I could like wave a magic wand? Like let’s say I had a magic wand, first of all. So we’re going to pretend. I went to Hogwarts school of witchcraft and wizardry, and I have a wand. And in this wand, this magic wand I could make one change. This is the change I would make. The change I would make is when you get your 401k statement or your IRA statement, or you see it online, your account online, the change I would make is I want the name of the account to change from Joe Smith, 401k to Joe Smith and IRS’s 401k. And then the other change I make my magic wand is I would wave it. And on your, on your online account, there you say, oh, a million dollars. And what it says is it literally says, Joe, here is your portion of it.

Mike:

$650,000. And then below that, here’s the IRS’s share of your money 350, because when you go online and you see your account is worth a million dollars, if it’s a 401k, an IRA, a 403b, traditional IRA, you have to remember this as money that’s never been taxed. And you have to remember, it’s not all your money. You are in a business. And your silent partner is the IRS. They have a share of that IRA. They have a share of that 401k. You don’t have a million dollars. You really have about 650. And once you understand that, now you’re in a position to make smart moves or smart financial choices from a tax perspective. You’ve got to start with understanding what is real and what is true. When you have a million dollars in your traditional 401k, you don’t have a million dollars.

Mike:

You’ve got about 650. The IRS has 350. When you have a million dollars in your Roth IRA or Roth 401k, then the truth is you have the full million dollars. The IRS owns zero amount of that account, but a regular IRA, a 401k, a 403b, it’s like a million dollar house with a $350,000 mortgage on it. You don’t own a hundred percent of that asset. You own part of it. And once you understand that you can start making good decisions. All right, now I know run up on the clock here. Here’s what I want to tell you tonight, we are talking about, you got a big let’s imagine you got that big IRA, that big 401k. When I say big, I’m talking over half a million dollars and you’re trying to figure out when should I convert this to Roth? You know, it makes sense, but when should you do it, should you do it in bits and pieces?

Mike:

Should you do it all at once? What should you do? Well, that’s a complicated question, right? Taxes are complicated. Our job. We want to make it easy. I like to make stuff easy.

Zach:

Easy peasy.

Mike:

Easy for me is a happy thought. So we have created for you. If you’re in that position, you were asking that question. For you we’ve created something we call the prosperity planning, blueprint. It’s a one page piece of paper. And on this one page, piece of paper, what we’ve done, there’s so many things you have to think about with your retirement plan and your financial planning. We thought, how do we drill down to the three core items that you have to get right? To truly live a prosperous financial life. Those three things are number one. You’ve got to get your money set up, right? You’ve got invested asymmetrically. Number two, you’ve got to have a paycheck replacement plan. You’ve got to make sure that your money will last. And number three, you gotta get your taxes, right. That’s what we’re talking about tonight is taxes. So if you’re in that position, you get that big 401k, that big IRA. Give us a call. Let’s let us create for you. Absolutely free a prosperity planning, blueprint, and it will help you answer these questions about Roth conversions and timing. Zach, how do they get their free prosperity planning blueprint?

Zach:

Mike, all they have to do is give us a call at (512) 886-5850. Again, that number is (512) 886-5850. Now don’t go anywhere, stick around. We’re going to be continuing our discussion on Roth conversions. When we come back.

Zach:

Mike, our show has started off awesome. This evening. We’re talking all about doing Roth conversions and not just Roth conversions, big Roth conversions. When is the right time? Is it right for you? Let’s dive a little deeper into this discussion.

Mike:

You bet. So here we go. That’s what we’re talking about. You’ve got it. Let’s imagine you have a large retirement account. You have over 500,000 in an IRA. Traditional IRA, not a Roth, a regular old fashioned IRA or a regular old fashion 401k or 403b or what have you, right? You’re sitting on you start and, heck, especially if you’ve got over a million and you’re like, holy cow, this you’ve got a million, 2 million, 3 million, et cetera. And the question is, how fast should you do Roth conversions? Do you do them in bits and pieces? Do you do it all at once? How do you know when you should do bigger chunks? Right? So I’m going to give you a couple of rules of thumb here that would indicate these are indicators. Now, remember, we’re talking about taxes here. So this is not advice. What I’m going to share is information.

Mike:

Hopefully good information. It’s not advice because as fiduciaries, I can’t give you advice about your situation unless I know about it. So I mean, if you call in the office, call in the show. You get that free prosperity planning, blueprint that we talk about. You know, you do that, then I can give you advice on exactly what the right thing is to do. But until you call in and I learned about your situation I’m tonight, I’m giving you information.

Zach:

That’s why the blueprint is so important because it’s personalized to your needs, goals, concerns, it’s for you.

Mike:

Yeah, and it makes it easy. Right? Easy, easy, easy. I want to make this easy for you. So here are some indicators that would tell you, maybe you’re in a position where I’m doing large Roth conversions early and paying some tax.

Mike:

Now a painful amount might make sense. Number one, what if you’re going to be in a pretty high tax bracket? Not just while you’re working, but in retirement. I have a gentlemen, you know, recently retired, actually. It’s funny. He retired. And then he started working again, funny how that works, right. Basically with him, he tried to retire and then his company called him back and they said, Hey, would you let’s call him Bob. Hey Bob, would you be willing? And this happens a lot. Would you be willing to come back to work, but not working for us, but maybe as a consultant, he’s like, okay. And I’ll be darned if he doesn’t make more money working less hours now than when he was working for them. Right, but anyway you know, he’s sitting on a pretty large IRA, $1.8 million. Right.

Mike:

But the problem is he’s got pensions, social security. He’s got big pension, social security. He’s got, got 1.8 in his IRA. Right. He’s got other accounts that he, I mean, he is going to be near the top of the tax brackets. He’s gonna be like, if you’re going to be over, say 250,000 of income, likely then this would be you. Right. So let’s imagine you’re retiring. You’re probably going to have over a quarter million, a year retirement income. And there are people like that. Right? I know we all want to be like that, but there are people like that. Well, if that’s you and you’re sitting on a, like in this case, he has 1.8 million in his IRA. Actually his 401k is what it was. I told him, I said, what I call him, Bob, Bob. Okay. I said, Bob, based on the math here

Mike:

And we show them like, we have software that really shows you this in dollars and cents in his case. Now this check this out by converting the entire amount all at once in one year and paying a boatload of tax, it saved him over his, him and his wife over his expected retirement lifetime. Like they expected, Hey, we’re going to live 25 years in retirement say. Over that period of time, it saved them over $5 million of tax.

Zach:

That’s a huge number.

Mike:

Isn’t that crazy. It was insane the amount of tax that saved him. Over $5 million of tax saved over their expected lifetime by converting all at once. If they didn’t convert, you just let it grow. You pull out your required distributions, that would lead to one level of tax. But by converting now paying tax, now it reduced their total tax in retirement by over $5 million.

Zach:

That’s wild,

Mike:

I mean, how awesome is that? Right? But if you think about it, why? You know, no more RMDs, when they do pull money out, it’s tax free. And you know, if you think about when you’ve got required distributions, you pull money out of an IRA, it makes more of your pension taxable, potentially it could make more of your social security taxable, makes more capital gains taxable. It makes everything more taxable, right? In this case, if it comes out as a Roth, IRA, it doesn’t have that negative impact. I couldn’t believe it. When I saw those numbers, it was incredible, huge, huge $5 million. Now, how much do it cost them though? Like you do the math, how much is tax? And $1.8 million. Okay. If you do the math, you’re like, oh my God. That’s like, assume like 37% top tax rate. And I’m going to call it 35% kind of, you know, it’s, it’s a little more than a third.

Mike:

So say $650,000, $700,000? Do you think he was excited, Zach, to say, oh Mike, thank you so much for this advice. I now have to write a check to the IRS for $650,000. Do you think that that’s what he said to me?

Zach:

Probably wasn’t his favorite day.

Mike:

No, no. He’s like, oh, you know what he said? He said, what a lot of people say, he goes, okay, Mike, I get it. I understand the math. Right? The math makes sense. Cause we even looked at other alternatives. We said, well, what if we break it out over time? No matter how we broke it out, just doing it now made sense. And he’s like, man, he goes, I just don’t know if I can write that check. So I said, Bob, what if you didn’t have to write a check? And of course he’s like, well, what do you mean?

Mike:

What do you mean? Like, what do you mean? I don’t have to write a check. I know I got to pay the IRS. It’s like, well, yeah, you got to pay the IRS. But I never said you had to write a check. Right? And he’s like, well, tell me more. I said, well, here’s what you do. You’re over 59 and a half. This is the magic age, 59 and a half. You’re over 59 and a half. Here’s what we can do. We’re going to take the 401k. We’re going move it to an IRA because you can only do this in an IRA. You can’t, to my knowledge, I’m unaware of 401k plans that allow you to do this. Right. We move it to an IRA and you can do this. Like we use TD Ameritrade as custodian. We use fidelity as a custodian. Either one of them, let us do what I’m about to share.

Mike:

We moved it to the IRA. We converted it. But what we did is we clicked a box and the box says, do you want to withhold tax? We said, yes, we do. What percent tax? 37. So what happened? And 1.8 million in the IRA. You click that little box that says withhold the tax. Now Bob has a Roth IRA with his share of the 401k. He took his money out of the 401k call at 1.1 million/1.15 and the 650, that was the IRS’s share, we said here fidelity. We use fidelity in this case because that’s where his 401k was that it’s like here fidelity, suddenly the IRS, their share in a lump sum. Just send them that check. And that’s withholding. Bob didn’t have to write the check.

Zach:

Nope.

Mike:

Now, yes. He had a 401k with 1.8 million and he’s a Roth IRA with 1.1, right?

Mike:

Yeah. There’s less money there. But this goes back to what we’re talking about a little bit earlier on the show tonight, he recognized, at least he recognized, like, it’s kind of like, here’s how he said it to me. He said, Mike, the way I look at it, it’s like, I got a million, $1.8 million home and I’ve got a mortgage of 650,000 on it. He goes by doing this, it’s kind of like, I’m just paying off the mortgage. Right. I’m just, it’s just like, I’m going to extract my equity of a house. I’m going to, it’s kinda like I’m selling the house and now the house I’m taking the money out of the house, the equity. And I’m just paying off the mortgage. Right. So there’s, he goes, but that’s kind of what it’s like. It’s kinda like paying off a mortgage. Like when I sell a house, I pay off the mortgage.

Mike:

Why wouldn’t I do that here? Especially if it saves me a boatload of tax over time. Well, yeah, it’s a no brainer. Right? In his case, it was truly a no brainer. And the fact that he didn’t have to write a check to the IRS, made it easy for him, made it doable for him. But remember to do that, he had to be how old, Zach? Over what? Remember what the age was?

Zach:

59 and a half?

Mike:

59 and a half. Yeah. 59 and a half. So if you’re younger than 59 and a half, he can’t pull that trick off. So anyway, here we go. We’re getting to the end of the segment. We got to take a quick break. But before we do, if you’re in this position, you have more than 500,000 in your IRA or 401k. And you’re wondering like, what would a Roth conversion schedule look like for you?

Mike:

Should you do it in bits and pieces? Maybe the answer to that is yes. Should you do it all at once? Maybe the answer is yes. I don’t know, but I can make it easy on you to figure out all you do is you give us a call and let us put together a prosperity planning, blueprint. Part of this blueprint. It’s a one pager it’s really easy. Part of this blueprint is helping you figure out where are you from a tax position. If you don’t do anything, where are you heading? What kind of outcomes might you receive? On the other hand, if you do something, how much tax could you save? And we start looking at what’s the smartest way to do that. So Zach, to get this blueprint make, let’s make this Roth conversion decision. Easy. You’re sitting there. You want it to be easy. Zach, how do our listeners make this easy?

Zach:

Mike? All I have to do is give us a call at this number. It’s (512) 886-5850 again, (512) 886-5850. It’s after hours, you’ve got to get our answering service. They’re just going to gather your name, number, and a good time to call you back. Our team will reach out to you your requested time to help you put together this prosperity planning, blueprint for you. Now don’t go anywhere, stick around. We’re going to be talking more and more about the impacts of Roth conversions. We’ll be right back.

Mike:

Number one question we get. Mike, how much should I convert each year? Number one question. I know I got to convert some money from my IRA to my Roth. I know it makes sense. It’s like these days, a lot of people understand this is a good thing to do. The question though, is what type of schedule or conversion schedule makes the most sense for your unique and specific circumstances? Right tonight, we’re exploring, you know, when does a large conversion makes sense? What does it make sense to just do a big conversion all at once. And by the way, before we keep going in the segment, I just want to throw out this number again. If you’re sitting there and you’re just saying, Mike, I just need a little help here. How do I make this easy? Well, just give us a call. I mean our phone number (512) 886-5850 again, (512) 886-5850.

Mike:

You just give us a and it’s after hours you get hit. I think Zach told you, you just get our answering service. They’ll set up a time. You talk to me, one of the advisors, you know, one of the team members will help you figure it out. We’ll make it easy for you. But obviously on a show like this, I can’t tell you exactly what to do because I don’t know your unique circumstances. I can only give you what I hope is good information. Right? So with that, as a prelude, let’s dive into another little client story where a large conversion made sense. So talking to a gentlemen, he, by the way, he might be listening. And so obviously I’m going to change the name. I, you know, anytime we tell you a story about someone, we always change the name to protect the innocent as they used to say in Dragnet.

Mike:

I used to like to use the phrase Fred and Wilma Flintstone as our, you know, hypothetical family. But I got in trouble because apparently that is what, what is it? Trademark?

Zach:

Trademark? Well, we just said it again. So might as well use them for this example.

Mike:

No, no, I’m not. I’m not going to use Fred and Wilma. I’m just going to reference that I cannot use Fred and Wilma. How about that? Yes. So in any event talking to this really nice couple and the husband, you know, he worked for one of the tech companies in town. Let’s call him Dave, right? Dave common name. I’m just making it up on the spot. So Dave works for a tech company. I’m not even gonna say which one, but like a lot of tech companies in town, he was getting these options, right?

Mike:

Like they would give him for part of his job, a bonus, but instead of giving them cash, he’d give him some stock. Right. And then Dave, as a day. Right? So let’s say his wife’s name is Brenda. Don’t know, again just popped into my brain. I don’t know why, but we’ll go with that. Dave and Brenda. Brenda, she works with another company, a different company. And same type of deal though. Another tech company, she also is getting company stock as you know, like bonuses. Now here’s the deal between them. They’ve got about 1.6 million in IRA, something like that, actually, I’m sorry, in their 401ks. Right. And you know, he’s like 61, she’s 58, you know? So he’s over 59 and a half. She’s not. And they’re just trying to figure out, Hey, what makes sense for Roth conversions? Right? So we did the math now check this out in their situation, right in there.

Mike:

And they wanted to retire on like 10,000 a month. So 120 grand a year. The problem was that, you know, later in their late seventies, early eighties, by the time he did the math, they’re required, distributions are like 165,000 when you’re just by themselves.

Zach:

That’s up there.

Mike:

Forget about social security and all other stuff, just the required distribution. And in there, they’re getting in their eighties and now it’s projected to be like 230,000. I mean, it’s just crazy numbers, right? So we did the math and we said like we did, they called in, they wanted a blueprint. That’s what we talked about. When you call our number, we’ll put together a blueprint. It’s free. It’s simple, it’s easy. So we put that together for them. And when we did the math, we said, all right, you’re 61. She’s 58. Let’s assume a 30 year retirement here because they wanted to retire in the next year or two.

Mike:

Let’s just assume 30 years out. How much in total tax are you projected to pay doing what you’re doing now? Assuming, assuming that the tax laws don’t change. Cause we don’t know. I mean, we know they’re probably going to change. We don’t know how, we know they’re not going to go down. Right. I mean, that’s not going to happen. If anything, they’ll just get worse, right? Like how much tax are you going to pay? And in their case, the numbers like $6.7 million, right? I mean, can you imagine, like you add up all the taxes over 30 years, 6.7 million. It was just some god-awful number. Right, right. And we said, okay, well what’s causing a lot of these taxes in their case. It’s these stupid, I, I shouldn’t say stupid, but these darn 401ks, money that’s never been taxed. And it was interesting. Cause he, I remember he was saying to me, he was like, Mike, I know we need to do conversions.

Mike:

Like when I showed him those numbers, he’s like, yeah, I know we got problems. That’s why I was interested in doing conversions. Like what scheduled should we do these conversions on to get the least, you know, to make this number as low as possible. Like I know I got to pay some tax over the next 30 years. How do I make it as low as possible? Which is a great question, right? This is the kind of stuff that gets me excited. You know, I hate taxes.

Zach:

I know.

Mike:

So if we can help someone reduce taxes, I’m excited. So in their case, we kind of did the math and we learned the ideal scenario for them was if he converted his 401k this year, because remember he’s over 59 and a half. He can use that trick that we talked about in the last segment, which is where, you know, instead of writing a check to the IRS, he just did the, you know, the withholding track.

Mike:

Right? So by doing that he did his, this year, then next year after his wife turns 59 and a half, because you do have to wait till 59 and a half, she would do the same thing. Yup. So all at once and you’re like, oh my gosh, they’re already in a high income tax bracket now. Cause they’re making decent money. They’re getting these stock options. That’s taxable. Right? It’s like, ah, anyway, we do that right. By doing that approach, they ended up now the new projected amount that they will owe in tax instead of 6.7 million down to about 2 million. Saves $4.7 million over their lifetime.

Zach:

Big change.

Mike:

Huge deal. And you know, I just simply asked him, Hey, I asked Brenda, I remember Brenda saying, she’s like, Hey honey, I think we could go on an extra cruise or two, by saving all that money. You guys must have some pretty fancy cruises.

Zach:

Million dollar cruises? How do you sign up for those?

Mike:

Can you imagine? But, but again, it goes back to step one. What is the number one mistake people make with tax planning with their retirement accounts? You think the money is all yours. In this example, they had like 1.6 million total. I mean, if you do the math, you’re like, you know, they go online, they see their 401ks. They were showing me, they printed off their statements and the statements had their name on it. And it had a total of 1.6,

Zach:

Mike, look, I got $1.6 million.

Mike:

That’s exactly what the statement said. But the best part I loved about the, this couple was, you know, Dave, he goes, he goes, Mike, I know that’s a BS number. He goes, cause he said, you know, based on, and this is kind of the way he said it. He said the way I think about things, something is worth what I can sell it for and put in my pocket.

Mike:

Right. Which I think I’ve said on the show. So maybe he got it for me. I don’t know.

Zach:

Probably did.

Mike:

And I probably got it from someone else. You know, that’s how it goes. But he goes, I can’t sell these things and put 1.6 in my pocket. If I sell this, I got to give the IRS, their share. So, and that’s when he said, he goes, I heard you say that on the radio where it’s like, you know, when like these accounts are really like a joint account with me and the IRS, he goes, that’s right. You goes, so step one, you gotta recognize that. Gotta recognize that once you recognize that you can start making smart choices. And in his case, he says, look, I like the idea. I want to buy my partner out. I want to separate from my partner. I want to take my share, give my partner their share and just go our separate ways.

Mike:

And by doing that, they saved projected, you know, assuming a 30 year retirement and assuming tax rates don’t change. They say about $4 million. Plus now if tax rates go up in the future, they save you more. But I mean what a great move. Right? All at once made sense for them. But here’s the deal. Does that make sense for you? I don’t know. That’s why we have these conversations. You need to be like Dave and Brenda in our little story here. Just make it easy on yourself. Give us a call. (512) 886-5850. Let us put together for you. A personalized prosperity planning, blueprint. And one of the key features of that blueprint is it helps you just like Dave and Brenda say, here are the taxes you’re projected to pay. And here’s what you could save. If you make some smart planning, moves Roth, conversion, just being one of them. So again, Zach, it’s, what’s that number again? It’s like 8, 8, 6. Give us that number again. I always mess it up,

Zach:

Mike, to get your own personalized, prosperity planning blueprint. You’ve got to give us a call at (512) 886-5850 again, (512) 886-5850. And now like we’ve said it’s after hours, you’ll get our answering service. You’ll set up a quick 15 minute call with our team and we’ll walk you through the super simple process to get your personalized, prosperity planning, blueprint.

Mike:

That’s right. You got to make it easy. All right. Now we don’t want you to go anywhere coming up. I’ve got yet another story where upfront conversions made sense. Who knows? Maybe it’ll be like you.

Mike:

You can look at me talking right now. I’m dressed in black today because I am confident. I am convinced that wearing black makes me look skinnier, always a challenge.

Zach:

I’ve got a nice slim striped shirt on.

Mike:

There you go. You’re, you’re not like, like, like you’re different from me. Your body is shaped differently. Let’s just say it that way. If you are on Apple, like an iTunes or any of those podcasts things, you can subscribe to our channel. Although I will say we’re talking about taxes this week. What was that? We did get a little bit of hate mail on our Apple podcast. Somebody did a review and they said that I don’t think we should listen to you because you should, instead of telling people how to save taxes, you should tell people, you know how to pay them or something.

Zach:

Something along the lines of that, we shouldn’t talk about taxes anymore, which was ridiculous.

Mike:

We should avoid teaching people how to reduce their taxes. Yeah. I think that’s probably not a path I’m going to go down. If you’re the kind of person that you’re saying, Hey, I think it’s important that everyone pays more tax to the government. You’re not going to like my show. I mean, you’re not going to like this show. You should probably just turn the dial to something else. Because I don’t like like me, the people we serve, they want, they’re happy to pay their fair share. They don’t want to pay extra. And if we can create some creative legal strategies to help you save taxes as part of your overall financial planning right now, that’s what we, that’s what we’re going to do. Now heads up, we are financial planners. We help people manage their money. Like we can help you manage your money. We help you create income plans to replace your paycheck. We help you with your insurance planning. We help you with your estate planning tonight. We’re just talking about taxes, right? Yup. Mostly because they drive me crazy

Zach:

Always. Every week.

Mike:

Mike hates taxes. All right. So here’s another example of someone where doing a Roth conversion all at once actually made some pretty good sense. Sure. So here we had a gentleman come in and this guy, you know, he does all the let’s call him. I got to come up with a guy’s name, Jim. Okay. We’ll go with Jim. Jim is good. Jim comes in by himself because you know his wife Francis doesn’t, she doesn’t deal with this stuff. Does all the money management. And here’s the thing, you know, they were both, they’re both retired teachers fit between pensions. They actually got some social security, but I mean, they’re good. They’re set that they aren’t spending the money that they’ve got coming in. Right. So every month it’s like the bank account just gets bigger. So he sitting on an IRA, actually it was a 403b that he had moved to an IRA and he’s got about 700,000 in it.

Mike:

Right. And I asked him, I’m like, Jim, what’s, what’s it for? What’s the money for here was he said, he said, Mike here’s reality. You know, both of our pensions are a hundred percent to spouse. So whichever one of us die, we’re spending the money. Now one of us dies. The surviving spouse still has more money than ever going to spend. He goes, quite frankly, and we have long-term care insurance. We got that covered. It’s like, honestly, it’s just money that’s going to the kids. And it’s, it’s really for the kids. And so I said, okay, it’s for the kids. Well, you know, it’s an IRA. So what’s going to happen when you turn 72, you know, under current law and his response, he goes, well, that’s why I’m here. Like I’m currently 71 and next year I’m going to start pulling money out.

Mike:

And I, and I said, how do we feel about that? He said, he goes, honestly, it’s driving me crazy. I don’t want to pull it out. It’s for my kids, you know? And he goes, here’s my problem. They’re in higher tax bracket than we’re in, right. They’re all doing great. Like one of them’s a doctor, I’ve got one, that’s a lawyer. I got a third. Like one of his kids actually runs a one of these PNC, like property and casually, like not a state farm insurance agency, but you know, an independent one. And he goes, he goes that kid’s making like seven figures a year. So which makes me think maybe I’m in the wrong business. But anyway, my point is here, he’s got this chunk of money. It’s for the benefit of his three children. They’re all doing well. They’re in higher tax brackets than he is.

Mike:

And he’s got to start taking money out next year and starting to pay tax. And I mean, it’s just like, we’ve got issues here. And so we start doing the math. Like we do these prosperity blueprints. We start doing the math. Well, how much tax are you likely to pay over your lifetime? And then how much is left in that account that goes to kids is taxable. And here’s what would have been the ideal answer. The ideal answer would have been to start taking money out of the IRA, maybe over a five-year period and then buying life insurance. Like life insurance would cover both their lives. That would have been the ideal scenario. The problem, neither one of them was insurable. They both had issues with cancer in the not too distant past. Now they were they’re over it. Right. They’re fine now they’re probably going to live a normal life expectancy because it had happened.

Mike:

So recently the insurance companies just wouldn’t like em, right? So that was off the table. Life insurance, not a solution. So the question is, should he do Roth conversions? Should he do Roth conversions? Because if he does, if that 700,000 were all over a period of time, moved to Roth IRA, then he wouldn’t have to worry about required distributions. And surviving spouse would have access to the money tax free if they needed it, they probably wouldn’t. But just in case, right. And it goes to their children tax-free who are in higher tax brackets than they’re in. Yep. So we did the math crunching numbers. We ran a prosperity planning report for him that we talk about all the time. It’s prosperity plan blueprint, ran the blueprint, did the math. Here we go again. In his case now again, you might be different. This is not advice.

Mike:

This is just information in his case actually made sense to do it all at once. Like just convert the whole thing now. And because we did the math, we’re like, man, if we stretch this out over time, just the way the income worked. Yeah. They would pay a lower rate, but it’d be on a bigger pot of money when all is said and done the cheapest way to do this, just do it now. Again, he was over 59 and a half. He didn’t have to write a check. He could do withholding. That’s what he did. He said, all right of the 700,000, roughly 200 of it, you know, 500 belongs to me, 200 to the IRS, roughly. He goes, that’s what I’ll do. I’ll just do a conversion. I’ll take my chunk and go my way. We’ll let the IRS had their chunk. They can go their way.

Mike:

And we’re free of the IRS for that money. Made wonderful sense in his situation. And that might, who knows for you, maybe you’re sitting there and you’re like, Hey, I’ve got this IRA money. It’s just extra money. When you’re sitting on an IRA, that’s likely going to be money. That’s just extra money. This is where upfront Roth conversions sometimes make sense. Life insurance makes more sense if you’re insurable, but this is where upfront. Just one time, big Roth conversions. It can make sense. But guess what? Here’s what I know. Every family is different. You have your unique, you have your unique situation. You’re not the same as your neighbor. You’re not the same as your brother’s sister. Everybody’s a little bit different. And guess what? Taxes are a little different for everyone too. And taxes are not what we would call simple. Now our system’s a bit complex, especially when you start trying to map out, not just what are your taxes look like today, but what do they look like down the road?

Mike:

So if you’re sitting there, you’ve got a pretty good size IRA or 401k, especially if it’s over 500,000 and you’re sitting there saying, man, Mike, yes, I know I need to do Roth conversions. I just don’t know what the right schedule is. Well, let’s just make it easy on you. Why are we making this hard? Make it easy. Just give us a call. (512) 886-5850. They get that right.

Zach:

You got it.

Mike:

That’s amazing. I just pulled that one off the top of my head. Do a radio show for two years. You might remember the, the phone number at some point. So there it is (512) 886-5850. Just give us a call. It’s after hours, you talk to our answering service. Here’s what they’re going to do. They’re going to set up a 15 minute phone call. It’ll be you. And one of the advisors and their job, let’s learn a little bit about you. Let’s put together for free, a personalized, prosperity planning, blueprint. And part of that blueprint helps you make good choices with your investing, with your income planning, you know how to make a paycheck, your paycheck how to replace that paycheck. So work can be optional, but part of it is also taxes and it, the, our job, our goal is to help you make those great choices with your Roth conversions. Right? So Zach wrap this up. What’s our number one last time.

Zach:

Into the show to get your free prosperity planning blueprint. All you have to do is give us a call (512) 886-5850 again, one last time, (512) 886-5850.

Mike:

All right, gang. That’s our show. We will see you again or talk to you again next week.