The Roth Conversion Sweet Spot: Maximize Retirement Savings (And Avoid Costly Mistakes)

Listener Nael opens up a discussion about Roth conversions. There are benefits to doing Roth conversions, but can you do too many? Are there any downsides to Roth conversions?

Reaping the tax benefits from Roth conversions requires hitting a specific sweet spot. If you convert too little or too much, you’ll be leaving money on the table.

So, how do you find Roth-conversion the sweet spot? James lays out five things you should consider as you plan when and how much to convert:

1. Macro and micro tax environment
2. Required minimum distributions
3. State tax brackets
4. Charitable giving
5. Legacy planning

Questions answered:
How might a future out-of-state move impact Roth conversion decisions?

What impact might Roth conversions have on charitable giving or legacy gifts?

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⏱Timestamps:⏱
0:00 - Question from Nael
2:20 - The wrong
4:27 - The right way
7:21 - The reality
9:12 - Macro/micro tax environment
11:19 - RMDs and state taxes
15:36 - Charitable giving
17:12 - Legacy and life expectancy
21:22 - Wrap-up

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Worried about retirement?

[DeVere]

Very well done. I would add the possibility of one spouse passing away and pre-tax monies being subject to single filer tax brackets as another major consideration for Roth conversions.

[williamwall]

Extremely comprehensive overview on Roth Conversions! Thank you James. The one discussion point that I didn't hear you cover was should your spouse inherent your IRA (because you passed) and now will pay federal taxes as a single person vs married filing jointly! Part of both a life expectancy and legacy discussion. Perhaps too, emergency should one spouse pass unexpectedly.

[jefflloyd]

Thanks, always good. Also know that the conversion has an access cost of 5 years, should probably be done after retirement but before taking social security, with a bigger window if you take SS at 70, but could impact IRMA. So it is quite complex. Also, I think of conversion as a hedge against a big bear market - do it when market is down.

[DrBilly]

Excellent analysis of Roth conversions!

There's also a psychological component that might arise in the context of Roth conversions.

A former colleague of mine retired a few years ago and we've kept in touch. We've discussed Roth conversions and I asked if he was planning on doing some. He said he'd done a little bit, but his financial advisor told him he could do more as the tax savings and RMD reductions seemed to work for him. When I asked him why he didn't do more, he looked me in the eye and said: "There's no <expletive deleted> way I'm writing a six-figure check to the IRS!" 😀

[whitleyca]

Another great episode! We are converting through the 22% bracket for 24 and 25 while we KNOW the tax factors. Future years will depend on how/if things change. IMO - the real win w/ Roth money is the flexibility and 'tax insurance' it provides, whether it be a large one-time draw in retirement, SS taxability, legacy tax on heirs, hefty tax increase for surviving spouse, etc.

[workdre]

I enjoy and appreciate your posts. Being a visual person, I'd appreciate some graphics to help me to better follow along

[mikemellone]

Fantastic explanation of Roth conversions, when and when not to do them. This is a very nuisanced decision. There are some many planners preaching Roth conversions without taking the full picture into consideration. I applaud your efforts to educate people.

[davidperry]

One of my primary reasons for conversion is the widow’s tax penalty. Based on longevity estimators, my wife will likely outlive me by at least 10 years. She’ll have RMDs on our combined IRAs after I’m gone, so I want to get most of it converted since she’ll be filing single (I assume 😆). I do plan to leave enough in the IRAs for a year or two of long term care; she may end up getting a good tax deduction on that expense. Thanks for the video.

[mariae.]

Great info... I'm hoping someday your company will accept clients with sub 2 million portfolios (1-2 million) but in the meantime I am about to retire at 56 and all the info that you and Ari have been putting out on youtube is great for all those saving and entering retirement early. I have seen many other youtube information on retirement and ROOT outshines them all. In a few months I plan on getting the retirement academy you guys offer for more information on an early retirement. Thanks.

[MrGoodaches]

Thanks for addressing this topic. So many headlines and emails shout Roth conversions and every phone call to my financial services company includes the rep making a pitch for Roth conversion. I kept wondering what I was missing. Every time I modeled doing a conversion I could see that I would lose money or at best break even a decade or two out. I knew the problem with Roth was taking money out of the game to pay taxes instead of continuing to grow until needed. Until seeing this episode by Mr Conole I was beginning to feel like I was alone in recognizing the value of letting money continue to work for me until I’m ready to spend it. It’s all about having a long term plan where our budget is coherent with current distributions and future RMDs so that we continue to be very active and comfortable without tipping over the top of the 12% bracket (or 15% if Congress allows reverting to pre 2018 tax brackets).

[joetemming]

Would LOVE call in show with “real” experiences. Long ago on PBS there was an excellent Saturday morning finance show with Chris Farrell - Sound Money. I even spoke to Mr. Bogle on that show and asked for advice:)

[gregbiles]

I've watched a zillion "retirement" videos and this is the only one that talked about roth conversions as part of estate planning. It's also the only video that touched on why taking a QCD is better than just taking your RMD and then paying the directly because if you take the standard deduction you'd end up paying taxes on the donation.

[pcash]

Another reason to possibly convert is to minimize the widow tax trap if you have a spouse. Same RMD but potentially in a higher tax bracket when filing as a single.

[janethunt]

You covered all the angles really well. Thank you for such a thorough explanation.

[RJN]

Great video! I would add the impact on taxes if one spouse of a married couple dies. While the remaining spouse may stay in the same tax bracket, their standard deduction will decrease leaving them with a greater tax burden unless they withdraw needed income from a Roth, Health Savings Account, or similar tax free account. Also, while waiting for RMDs to kick in, if you can live solely on Social Security, Roth, HSA, etc. tax free withdrawals then you will pay no federal or state income taxes effectively dropping your tax bracket to 0%. These are the primary reasons I'm making Roth conversions prior to taking SS so please let me know if I'm wrong!

[fshsac]

Particularly useful data. SO glad I have found James.

[gmale]

Appreciate these Vids. Some stuff might be easier to understand with illustrations. Just a thought

[EJJ-EvArms]

Also consider in your early examples where the tax bracket is the same, even if one is paying the same amount, those $$ are worth way more up front due to inflation. Add in theoretical opportunity cost, and it gets even dicier.

It all comes down to both the tax bracket at the time the tax is paid, and inflation/value of the dollar at the time the tax is paid.

[preparingforretirement]

My plan is to retire early at 59, and to live off of cash savings for several years and to take an amt each year from IRA/401k to convert to add to our existing roths that will fill up the 10% tax bracket after the MFJ standard deduction. I *might* venture above 10% but we'll see. We have pretty low expenses. We will have a lot of cash outside of tax advantaged and tax free that we will be living off for years and delaying SS payments - that will leave my Roths to grow as part of our legacy for family.

[rusilver]

best explanation I've heard in awhile -although others have given the same information, this was given in a more digestible version