Dave Ramsey Is Disastrously Wrong on Roth Conversions

There's very little I agree with Dave Ramsey on, especially Roth Conversions. In this video, I analyze what Dave Ramsey has stated regarding Roth Conversions and how many details he is excluding that costs people hundreds of thousands of dollars.

0:00 Intro
0:45 Tax Brackets
3:50 Paying Taxes on Roth Conversions
6:25 The Five-Year Rule
8:09 Summary of Dave Ramsey Roth Conversion Statements
9:12 Conclusion

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[Inmate]

Dave Ramsey's good at advising people on how to get out of debt. On investing...not so much.

[magicbus]

Great advice. I realized I was getting myself into a tax liability with my Trad IRA and My 457B plan about 3 years ago. I had a big winner in Tesla stock in 2020-2022. My deferred accounts went way up over 1.2M. I had saved for 30 years at work in a 457b and for several years in my own Roth IRA. Suddenly I was forced to retire because of Covid mandates. I started making large Roth IRA conversions about 3 years ago. This year was 300k, next year will be my last year doing 228k. I am so happy I woke up and realized what was ahead. I read your book and watched a couple videos recently. I was a state worker so I accumulated a large pension so I won't be in the zero bracket in retirement. But at least I have a multi million dollar tax free Roth account. Thanks

[lidarman]

The 24% bracket is the sweet spot for sure. But it is better to pay the tax with cash if you have it.

[philosophyze]

I came across Garrett Gunderson and his book "Killing Sacred Cows" and it started my mindset transition. One of the biggest differences between financially successful and unsuccessful is how they think about money and wealth.

Dave Ramsey teaches a budgeting "shrink your way to wealth" mindset vs an abundance creating more value mindset.

[robannmateja]

I agree that Ramsey's statements about the 5 year rule were inaccurate, as well as not considering Roth conversions in retirement. But there is something else people need to watch out for if they are in retirement and on Medicare. Doing conversions could also bump you up into an IRMAA bracket and those don't work like marginal tax rate brackets. One penny over and you can get hit with a HUGE monthly Medicare Part b premium. Yes, that lasts for two years and not in perpetuity, (or one year if you can get it adjusted), but it's something to watch out for when doing Roth conversions. But the benefit is once converted, you can use those funds without worrying about IRMAA. I look at IRMAA as another form of taxation (and one that can be very unfair to seniors... for example, if you sell your home to go into assisted living, you may have to pay a huge IRMAA penalty if the proceeds exceed the allowed limited on capital gains- not an uncommon scenario).

[cayankeelord]

One downside of using converted IRA to ROTH funds to pay the taxes due on the conversion is those funds are effectively removed from the tax free protection of the ROTH reducing your ability to create more tax free wealth.
If you have other funds to pay those taxes, you will come out ahead by leaving those investment dollars in the ROTH and put them to work!

[MaumeeQuilter]

Why do you keep assuming that conversions need to be done all at once. Do it over 4-5 years while you're young!!

[kwilliams]

In addition to the 59-1/2 5-year rule, there is also a 5-year rule on NEW Roth accounts. The account must be OPEN for five years before money can be withdrawn. This doesn't apply to many but it is a potential gotcha. Yes, I was stupid enough not to open a Roth before retiring but it really doesn't matter much.

As far as tax rates, I don't see the 10 or 12% rates going up much. I don't see much of a political apatite for "taxing the poor". There is also huge jump in taxes for conversions at the $47150/$94, 300 mark. I sure don't see the 12% bracket going up to 22%.

[wyzyguy]

I did exactly this … filled up the 24% bracket… paid the tax in cash because I’m under 59.5 … it was hard to believe it was worth it but forward tax planning showed me that it would force me into higher brackets in the future if I we into early retirement with too much pretax $. Don’t convert too much but consider taking a look before 2025 ends. If I waited to retire to convert the tax brackets would at minimum 10/15/25/28 Vs 10/12/22/24.. 3-4% makes a massive difference when compounded over what I hope to be a 30+ year retirement.Good video. Everyone’s situation is different and it is very difficult to determine without really taking at look at all income sources and getting a handle on expected expenses. A planning software is a must.

[formeyousee]

At 7:36 are you saying that my higher income at age 50 means I shouldn't convert traditional IRA funds to a Roth IRA because I'm already paying a high 32% income tax and shouldn't add the conversion tax to that?
I should wait until after 59 1/2 when I'm retired with a lower income and then do a Roth IRA conversion?

[NicholasGramazio]

Great video, thank you! I'm looking to change my Pre-Tax 457(b) to a Roth 457(b), but just want to make sure its our best option. I am in year 5 of a 30 year career (90% pension retirement, annual final compensation is our best 8 years and I expect a 5-8% raise every year). Given this, is it safe to assume I will be in a higher tax bracket at retirement than now, therefore Roth 457(b) is the way to go? Thanks!

[mikeng]

You’re soooo right. Dave is preaching to the financially unsophisticated. Sadly, that’s most of the population. So basically, Dave has designed his advice to appeal to most people. But you’re also right, one size doesn’t fit all.

Ramsey is not for me.

[ronaldmoody]

Why do you think tax rates are going to double in the next 20-30 years?

[Tony-dxeo]

I'm ok with the 10 and 12 percent tax brackets but it's a huge jump from 12 to 22% (83% increase!) that I'm not a fan of.

[casperlabuschagne]

Thank you, sir! That was one of the most useful 10 minutes I have spent in my research on Roth conversions.

[biblebound]

My Question: I am maxing out my Roth IRA as well as my Federal Government TSP Roth. I am also over 61 years of age. Can I convert my Traditional TSP into my Roth TSP at anytime?

[justinchamberlain]

Good subjects mentioned to re-review
0:55 tax bracket factors

[pcash]

I have done some forward tax planning myself and also used an advisor and numbers show I should actually go into the 32% bracket last year and this year. I’m retired with a pension and cash available to pay the tax. But do you ever see a scenario where 32 % makes sense. I look at my total after tax net wealth not just taxes paid to make my conversion amount determination. I’m 60 years old. Thank you for the info you shared.

[nmort]

Great video!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?

[brianprobert]

I came here seeking clarity and ended up more confused than before. The part about only 5% of people being able to pay their tax bill on the conversion with cash doesn't make sense. Your example seems to have someone trying to convert the entire $1M all at once. Ramsey doesn't tell people to do that. He recommends one bite at a time maximizing the lower tax brackets. The other consideration that I have to figure in is our 7% state tax which takes another sizeable chunk. I need to boil it down to a simple equation I can work with