Finding the Sweetspot For Paying Roth Conversion Taxes

What is the most optimal way to pay Roth Conversion taxes?

Running the numbers in a 'clean' calculation shows that paying out of your taxable account is the most optimal.

But what happens when the calculations aren't so clean? What happens when paying Roth Conversion taxes out of our taxable account causes us to sell an asset and thus generate more in taxes.

Does this ruin the value of this Roth Conversion strategy?

In some cases, yes. In many, no.

Paying conversion taxes from our taxable account requires us to factor in a lot of different variables:

✅ The long term capital gain rate we are paying today vs. the rate we would be paying in the future

✅ Whether we will be using the taxable account for income during our life or using it as an estate planning tool for the next generation?

✅ How much tax drag we are generating by investing the taxable account?

✅ How much unrealized growth is in the taxable asset we are selling?

✅ and many more...

Coordinating these variables in the most optimal way is a layered calculation that will adjust with very small changes in each of these given variables.

In this video, we talk through these variables and finding the Roth Conversion sweet spot for paying Roth Conversion taxes out of your taxable account.

#RothConversion #RetirementIncomePlanning

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Always remember, "You Don't Need More Money; You Need a Better Plan"

[gs]

In the case of an already retired individual/couple it is even more complex as maxing out 22% or 24% results in substantial increases in the monthly cost for Medicare and IRMAA. While there is a delay of implementation of the higher costs, the amount of increase is a doubling or more in the monthly costs.

[smd]

I learn so much from your videos! Thank you! I am not aware of any other organization that is creating this kind, this quality and this much content in the area of retirement planning and financial literacy. I am constantly amazed at the work that must be required to create the slides and the associated production for just one of your videos. Great Job!
Could you expound on the point at 16:30. Concerning... if you take the dividends as income instead of reinvesting them you eliminate tax drag? Is this because, if you were to reinvest, you would be buying more shares which would be paying an additional dividend in the future, thus creating additional tax drag going forward?

[apeel]

This addresses a question I have had in the past about the implication of added taxes created by paying conversion taxes from a taxable account. Thank you!

Now another analysis I would LOVE to see you tackle is a break even analysis of allowing an IRMAA penalty to be triggered as part of the Conversion Strategy. Is it correct that avoiding IRMAA is ALWAY the best strategy or is there also a break even analysis here as well? In my case, I like the idea of considering a strategy based on the assumption that the focus is on legacy planning as current income is expected to allow for legacy planning on all three investment account types … pre-tax IRA, ROTH IRA, and Taxable / brokerage accounts. Any chance you would consider a deep dive on IRMAA penalty break even analysis?

[ksgtokgo]

I've always been bothered by the blanket assumption that it is best to pay conversion tax from taxable account. If one is already retired - that taxable account will have to be replenished from somewhere (assuming annual withdrawals are required for living expenses). So, the replenishment has to come from either the Roth account or the regular IRA, and you are back where you started. Living expenses are coming from one retirement about or the other.

[sirreptitious]

It sound straightforward until I realize; I don’t know what future returns will be, I don’t know what future taxes will be, I don’t know what future inflation will be, I don’t know what my future expenses will be, and I don’t know how long I will live! Best strategy is to live conservatively because I don’t know much about the future.

[michaelkevdzija]

One variable you can introduce is using a heloc to pay the taxes

[jsilverback]

I have seen dozens of your videos. I really like the style you use here. It would help to know the dollar amounts that the different situations indicate. Thanks

[MarkUnique]

16:30 I like this tax drag as income case, but I wish it were done with 15% current LT rate ... maybe 18.8% was needed to show a benefit to taxes out of conversion 🤔

[slimdawgwoof]

This is really solid - would love to see more. Hard to calculate manually without software.

[beach]

Great video, wish your firm offered " The Forward Looking Tax Planning " without portfolio management for those of us who are successful self-directed investors. Are you licensed for clients living in Oregon?

[twhite]

I need to pay taxes for a Roth conversion out of a traditional Roth. I need to determine the optimal amt to convert over 4 years. Part of the IRA withdraw pays taxes, the rest goes into Roth. Do you have a video on this?

[ghost]

I just take a loan on margin from my taxable account and pay it back with dividends from the stock in it.
In my case it works out to be lower overall.

[gieb]

Yes, it's a nightmare created by our own government. Thank you very much

[timemanagementisinvesting]

When possible, tax loss harvest a loss from your taxable account to pay the required tax on the Roth Conversion tax.

[josephj]

So many interconnected moving parts affecting each other! ACA, Then Medicare 2 yr Look Back? IRMMA, RMD? Tax cut sunset? Gotta thread the needle with out getting Poked!

[josephj]

I just turn 60, have 450, 000 in 403b 5000 Roth 403b - tbey just allowed it last yr. Want to retire Soon! Thinking of doing 1 Big Roth Con while still working while I have full Health Care so I can keep expenses down if I go on ACA? I am single, I made 60K last year so if I cud do over 100K in 24% bracket. Wud pay taxes out of Conversions - Not an option, no outside accounts! Get this done now . RMD Prob won't be a big issue? But IRMMA Might? Will be using 403b money. Have $1840 p mo pension or shud I take-up sum of $235K payout? Very informative videos! Good job!

[jimlow]

You're a much better investor than me if everything in your taxable account is positive. I'd sell losers to balance out the winners in the taxable account to minimize capital gains.

[magicbus]

I like your subject material, but you talk to fast. It is hard to follow your line of thinking as you edit the video in such a way that the listener can't follow you easily.