Roth Conversion Breakeven? Don’t Make This MISTAKE in 2023...

Calculating your Roth Conversion Breakeven Point is an essential step in any forward-looking tax plan.

But I find that most retirees think about a Roth Conversion breakeven in the wrong way.

They think about it in terms of time. Watch this video to see why TIME doesn't matter and find out the most critical variable in your Roth Conversion breakeven calculation...

0:00 What is Your Roth Conversion Breakeven?
0:54 The Wrong Way to Think About a Roth Conversion Breakeven
1:55 The Tax-Deferred Mirage
2:11 Comparing Roth Conversion to No Roth Conversion
3:00 The Roth Conversion Breakeven Centers Around THIS!
3:36 Reasons for a Roth Conversion
5:14 What if I pass away early?
7:20 A Common Roth Conversion Mistake

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

[wdeemarwdeemar]

For me the ability to not have RMD’s and avoiding the widow tax trap when my wife or I make that last revelry is as important to me as any other benefit.

[apeel]

You videos are the best. Hands down. I will watch every one going forward. That said, I noticed that recently you have added a music sound track in the background. I would respectfully suggest that you do not do this going forward. Depending on what type of device someone is watching your videos on, or how old the listener is, the music can make it more difficult to hear you well and focus on the details you are presented. Thanks for all your efforts!

[jpdriver]

One of the best explanations of the hurdles I have seen. Thank you! This reaffirms my decision to complete conversions before taking SS.

[vistahawk]

Thank You Sir....I have learned a lot from your videos. I started two months ago with zero knowledge of the value of Roth conversions and this week submitted a conversion for 2022 (even though I am still working). I see lots of value in having my money grow tax free and stabilizing my RMDs.

[davidroush]

Agree with most of the presentation. It captures many of the reasons my wife and I are making significant annual ROTH conversions over about a 15 year period until I reach RMD age for my 401k & IRA. We are also delaying claiming SS until I am 70. We don't need the income now and taking it before 70 just reduces the ROTH annual conversion amount we can make before breaching the next tax bracket. We are about 7 years into our conversion ladder and already converted approximately $800, 000.

I slightly disagree with the conversion example showing the ROTH never catches up. The calculation uses $100k left in a tax deferred account vs. only $80k for the ROTH, assuming you used part of the conversion for the taxes. But it is different if you convert the entire amount then pay the taxes due out of pocket, i.e. the full amount ($100k in this example) is invested in the ROTH as well. This is how we have approached it.

I fully agree it is all about later tax rates. I still think in terms of time (sorry). For example, if I paid $20k out of pocket to move that full $100k into the ROTH, then if it is invested making 6%, it has paid me back for that conversion in a little over 3 years. Now assume the $100, 000 might double 3 times before an heir would need to exhaust these funds, or to $800, 000. If the heir is still in the 20% bracket, they will owe $160, 000 on the tax deferred account vs. just the $20, 00 tax paid on the ROTH decades before.

Another consideration is the "widow tax" where one spouse passes then the survivor often moves up at least one tax bracket as they have to file single. ROTHs can help reduce RMD income to avoid a surviving spouse permanently being pushed into higher brackets. And, if you believe that the government will need to raise more tax money over the coming decades, then the ROTH conversion earlier would have been even more valuable.

That is how we came to the decision to make significant ROTH conversions and bleed down the 401ks and IRAs as much as possible before RMD age. It will be too late to reduce RMDs later, so the earlier the better and greater the benefits, especially if at least of us lives another 20 years then 10 more for our heirs. Definitely worth the pain now in our situation.

[robstreicher]

This guy is brilliant! I've learned a great deal from him. Love his videos!
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[davidbrisbin]

Great video! I really like the information that you present and the manner that it is displayed. Thank you also for speaking a little slower - some of the past videos have required me to "rewind" several times to figure out what you said. How about a video (or can you recommend one) about withdrawing money from IRA/401k for living expenses while waiting several years to get full retirement age for Social Security AND doing some Roth conversions at the same time. Thank you again for sharing your knowledge!

[viking_fisherman]

Nobody, and I mean nobody on YouTube explains the complexities of retirement finance issues better than you And you have put out so much information, with just a little effort to find the right videos, anyone can learn all they need to much better understand what they face going into retirement. This better arms folks with the necessary information to better plan their own distribution strategy or to better participate in conversations with a financial planner.
Please keep these videos coming!!!

[mikeryan]

Thank you for this. 99% of so-called experts get this wrong. Current and future tax rates are the ONLY consideration.

[terryadams]

Excellent video! Thanks Eric! I'm looking forward to your deeper dives on ROTH conversions.

[tracyalanlownsberryii]

Great Video from another financial professional. I learned a thing or two!

[mikefochtman]

I've been looking into this a lot lately. Since I have a pension, when I file for SS at 70, I will be in the enviable position of not needing to withdraw from any tax deferred account. But as they continue to grow, my RMDs will also. For me, it actually looks like I can convert a lot, even at the cost of higher brackets and IRMAA payments now, for the next 5-6 years. By paying now to do a very large conversion, I can avoid RMDs pushing me into higher tax/IRMAA brackets for (hopefully) many years after age 72.

Because growth outpaces RMDs for the first several years, I would end up better off doing the large conversion now (especially if tax rates are expected to rise)

[kentarquinio]

Your presentations are quite thought provoking. I wish that I had watched them five years ago!

I am no accountant. So, I am unsure if my analysis is sound. So, one should not act on my observations without confirming that they are correct.

A common theme of your videos is that the thing of greatest importance is the amount of tax paid on a conversion today versus the tax on a future conversion. You state that whichever offers a lower taxable rate is the best choice. However, it seems to me that this minimizes the importance of conversion. My understanding is that once a tax deferred account has been converted, there will be no additional tax on future earnings. However, a tax-deferred account not converted will continue to earn income that eventually will be taxed when withdrawn. However, over many years, the funds converted to a ROTH will continue to earn income that is tax-free. Let's assume that converted funds continue to earn income at six percent annually and one is in the thirty-two percent tax bracket (easy to do if one lives in California). In this case, this is a little under a third of the future earnings would be paid as taxes for tax deferred income versus no additional taxes for funds in the Roth. That would result in about two percent additional income per year after taxes. If this is compounded over many years, it would amount to significant income. The implication is that even paying taxes at 40 percent (state and federal) to avoid taxes at 32 percent in the future on an investment that earns six percent annually may be a good idea if one expects to earn income tax-free for several years after the conversion. I calculate that after a little more than four years using such a strategy a person would break even and after that a person would be money ahead. When one considers that a person can also convert a taxable investment to a non-taxable investment by paying the tax on the conversion with funds that would otherwise be taxed in the future, this makes conversions even more attractive. Of course, there are other cost issues such as possibly losing the affordable care act medical premium subsidy or greater premiums for Medicare (IRMAA), and the social security torpedo. These would have to be factored in for people who would be affected.

Another concern is the widow's tax. Converting prior to the death of a spouse would eliminate this tax on funds that have been converted to a ROTH. When one considers that some people may have a federal marginal tax rate jump by seven percent or more if one's spouse dies by not converting prior to their death, one can see that early conversions would be beneficial.

Another observation that I have is about choices that pensioners might have when starting a pension. I had a choice of whether to continue my pension at the same amount after my death for my surviving spouse or take a larger pension that would decrease or be eliminated upon my death. The pension administrator claimed that the statistical probability of the various options was determined to distribute the same amount of money for the average annuitant. Now that I know about the widow's penalty, I wonder if continuing payments at the full rate was better or taking it earlier might have been a better choice.

One final observation is about pensions not indexed to inflation or pensions that are not fully indexed to inflation. My pension is indexed to inflation. However, it is capped at a two percent increase of the first year's benefit each year for the rest of the beneficiary's life. With inflation at eight percent, that means that my pension's purchasing power decreases by roughly six percent in the first year and increasingly more if inflation were to continue at eight percent. If income taxes are indexed for the full amount of inflation, then the tax brackets that I would need to pay in in the future may actually decrease. This might be a factor that a person might consider when making a conversion.

[KarenDemille]

a lot of good information and I may not understand much of it. I decided 3 years ago to open Roth IRA accounts for our adult daughters and I have funded them and recently opened a Roth for an employed grandchild as well. I received an inheritance from my grandparent that covered my college expenses, so I am paying it forward. So pleased that I began my own conversions a long time ago and with a very reasonable amount in a non-Roth, my RMD's will likely just $5k to start in a couple years. I avoided opening any 529 accounts as I think helping my grandchildren with their college out of my Roth IRA allows me to have more control. The unused 529 conversion to a Roth is nice, but the $35k limit to the conversion is kind of small. I would encourage others that have a desire to leave a legacy to their heirs to consider leaving them some of their inheritance while you can see how it is utilized. Just a thought! Blessing to everyone!

[nikroo]

There is indeed a break even point as someone else also seemed to mention. This is given the RMD start up time (now 75 years old given the new law) and how much you earn outside of such forced distributions at that point in time. And of course taking into account the tax brackets as mentioned as the key parameter. So, one can end up with a much more advantaged positon without a conversion if one is in a high tax bracket now and then the early RMDs still put them in lower brackets until the RMD factor becomes so high that one ends up in a higher tax bracket. So one has to put this all into a spreadsheet or formula and indeed find the break even point which does exist.

[emmymayer]

Content is clear and helpful. Thank you. Please ditch the background music. It is highly distracting.

[timeveritt]

Oh man...I need that "Problems that RMDs Can Create" graphic! That's a nice reminder for doing Roth conversions. The Widow Trap should be first and foremost in anybody's mind for a married couple. Huge tax rate increase plus IRMAA plus who knows what else. That plus the SECURE act killing the value of an inherited Traditional IRA really help to tell the story of destroying your hard worked for chance of leaving a legacy. .

[jimlow]

My heirs will be at higher tax brackets than me, therefore I'm doing the conversions and taking the hit now.

[rickblake]

I saw one of your illustrations mentioned the widow trap but you didn't discuss it and I haven't seen you discuss it in the 5-6 videos I've watched so far. Have you discussed it? It seems to be a big issue for the surviving spouses taxes making a conversion more sensible.

[rodrigok]

So, if you have 7 figures in your retirement accounts and RMD’s start in your early to mid 70’s, it’s beneficial if you can convert some of that money at a lower rate. When RMD’s start, it forces you to take money out. If that pushes you into a 22 or 24% tax rate, you are losing some of that money that you could’ve converted to Roth in smaller increments reducing your future RMD’s.