How Much Should You Convert To A Roth IRA?

Hello everyone, bill Lethemon here for the money evolution. In today's video I'm going to discuss how

much

they

should

convert

from a traditional rage to a

roth

rage or honestly whether or not they

should

do a

roth

conversion, so if you've been on the channel and you've heard me talk about this topic before, it's You may have heard me talk about the number one thing that matters when you're trying to determine if you should do a Roth conversion or how

much

you should

convert

and so on. it's what your tax bracket is today compared to what your tax rate will be in the future and perhaps, contrary to what a lot of people have been taught to believe here with respect to their traditional retirement accounts, is that they keep this money . they took a nice tax deduction when the money went into those accounts and then they thought, well, I'll be on a lower tax rate when I retire than when I was working and the reality that we're seeing for many of our clients is that As we get started As we look at these expected minimum required distributions and the large balances that are starting to accumulate for many people within these IRA accounts, we found that it's very common to see someone with a higher tax rate in retirement than when they were working, so this is what we're going to talk about today and a couple of key considerations that you need to keep in mind as you try to figure this out now.

That said, one of the things we do here with our clients is do comprehensive financial planning, so today we are going to go into a lot of detail, the best way to do this is through a comprehensive financial plan that includes a cash flow complete and also a fiscal analysis so that we can see based on a number of different inputs that we are going to talk about in this video, how they will play out over the next 5, 10, 15, even 20 or 30 years, so you can see what those future tax rates may actually be based on a number of these assumptions, so if you'd like to learn a little bit more about the financial planning that we do anyway, you can head over to ricavisionplan.com.

There is information about our financial plan that we do for clients and if you like what you see. there, I think there's a button to start now, answer a few questions and you can schedule a free consultation with me to see if it's something that might be right for you, so let's dive into the video today here, okay, so let's jump in and talk about a couple of these key considerations that you need to think about and remember what we're talking about here is trying to determine whether or not you might be in a higher tax bracket in retirement or a lower tax bracket and again what we're At the end of this video we'll get to try to determine a little bit how much money you should think about converting annually and also remember that you don't necessarily have to wait until retirement because I think that's something that a lot of people mistakenly think is that they're still working, maybe They're still thinking that they're in a relatively high tax bracket and maybe they're putting it off by saying, hey, I'm going to do some Roth conversions, but I'm going to wait until I retire to do that, so I hope that some of the information that I give them in Today's video here may help debunk that a little or at least get you thinking about whether a Roth conversion is effective or not.

It makes sense even if you're still working and still earning what you think is a relatively high level of income, so the first thing you need to think about is how much you actually have in those traditional retirement accounts right now just to do this. relatively simple here, let's say you're 62 years old and let's say you have a million dollars in traditional retirement accounts and again one of the things you have to think about is whether or not you're still working, so if you're still working, right? ? continue to contribute to that account, it still continues to accumulate just from your own contributions there and that may be a factor that we definitely need to consider, but the first thing we want to do is start thinking about what's probably going to happen. that will happen in the future and so if we don't touch this 401k or ira plan, whatever it is traditional and we get to age 72, what happens at 72 is the required minimum distributions, um, that It's something that changed recently, it used to be at age 70 and a half you had to start taking those required distributions, but now you're 72, so if you're earning, let's say a seven percent rate of return, just to make our super easy math, we use that rule of 72 all the time.

So if we divide seven percent by the number 72, it tells us that we're going to double our money in about 10 years, and by the time we reach age 72, we could have about $2 million in that account, and again, There are approximate numbers. There will be a table that you will use to determine what the minimum required distribution will be. The first year distribution is a little less than this number, but we said you generally like to use around four percent, which means you might have around eighty thousand dollars of income that you'll have to take out of that retirement account. traditional and again, these numbers, you know, they may be a lot larger for you, they may be a little bit smaller, but these are the things that uh, you want to be thinking about what we really want to think about is not just what that account will grow. and that's why having some software that specializes in this really helps make this flow a lot easier because one of the things that this entails is your cash flow and what I mean by that is you can't necessarily leave that IRA. over there;

You may have to take out some money just for daily living expenses if you plan to retire sometime between 62 and 72. So you want to understand what that anticipated cash flow need might be. The other thing you want to think about is whether the IRA is your only source of money, so you can have, as we talk about it, money in each of the three tax groups, so one of those groups in the What we see a lot of people who have some money is the non-retirement group, so it's outside of Roth ira or traditional ira and what happens a lot of times is that, in general, people don't like to pay taxes. and they know that if they take money out of their ira they will have to pay taxes on it, so if someone has accumulated a large amount of money, let's say they have to follow our example here, let's say. they have 500,000 in this non-retirement account, they know they may be able to access that, especially if it's cash or even if it's invested in something that they may have to sell, they may be in a lower tax bracket because they may be paying zero. taxes if they're just taking it out of a money market account or they might have long-term capital gains or dividend income that they can use to supplement that income, so you want to understand what the cash flow is and what your anticipated needs are. with this and again what this will do is give you an idea of ​​what's going to accumulate in that ira account now and you'll also want to make sure that We're including other forms of income like pensions of course social security would be another one and remember that the 85 percent or up to 85 percent of your Social Security benefit could be subject to taxes.

You may have other sources of income. You may have income coming from it. an annuity if it is something that is paid on a regular basis, so you may have annuity income, know real estate, if you are renting property or maybe even some deferred compensation, let's say you received it from your employer and maybe For at least a few years or maybe up to 10 years of your retirement, you will receive some of that deferred compensation, so you want to understand, as you go through this, what your tax rate is year after year and what you're going to do . that in trying to determine what your taxable income is in each of these years in the future, what we're going to do is start to look at where that income falls within the different tax brackets and again that's what we're going to use to take This determination is knowing what your tax rate is today versus what that tax rate will be in the future, so once you've done a couple of those calculations, you'll have an idea of ​​where your taxable income may be this year and more or less in the future.

What we want to do is take a look at where that income falls within the IRS federal tax brackets and again update here what we're going through. Right now, for 2021, we still have the Tax Cuts and Jobs Act that went into effect in 2018 and are set to expire at the end of 2025, so in 2026 we will go back to the old pre-tax tax schedules. cuts and jobs play out so we will have to see what happens and there is always a chance that tax rates will even change before they are left low and made more permanent or changed and raised and of course that is one The fear many people have is that tax rates will continue to rise;

In fact, that's one of the things we talk a lot about: we think tax rates are more likely to go up than go down. So these are some of the things that we want to think about as we look at this and if we look at the tax table here and make it a little bit larger, you know we can see, let's say our income is 250,000, so what we have What to do is find married couples who file a joint tax return, where is it? So if our income is, you know, over 172,000 and we say we have 250,000 of taxable income, we know that we are in tax bracket 24 and starting in 2021, the tax rates we can go up to 329,850 and still be in that same tax bracket 24, so again, when we start planning this, we see that okay 24. tax rate What is that rate probably going to be in the future?

Will my income be fairly consistent? Do I expect to still have 250,000 in taxable income? Will my future required minimum distributions possibly push me? into a higher tax bracket if I'm not a little more aggressive with some of those distributions and one of the things that we can do and we'll continue to go back to these old tax rates, this is the 2017 federal tax table. and I put this here because This is how the tax worked before the Tax Cuts and Jobs Act went into effect, so if nothing else happens and Congress does nothing, we'll go back to this tax table now, of course it will be adjusted a little to inflation, so the numbers we see here will be a little bit higher, if they do in fact go into effect in 2026, but we can see here that 250,000 of income actually for a married person filing a joint tax return in reality.

Put us in tax bracket 33, so again, what's our main thing that we're trying to figure out as we look at Roth conversions? Will our tax bracket be higher in the future? If so, we might want to. pay some taxes right now, so in this case, here to answer the question of how much money should we convert well, something simple would be to convert, I guess, around 88,000, or so, which is the difference between the 250,000 of taxable income . which we have now and the top end of the tax bracket there uh 329,850, which is the top end of tax bracket 24, okay, so probably one of the easiest answers to this initial question that I mentioned at the beginning of the article.

The video on how much money you should convert to a Roth ira is simply looking at where you are in your current income tax bracket and then thinking about doing a Roth conversion that will take you to the top of that bracket, so in this example, I've been using here if you have 250,000 of taxable income, you can contribute or convert, I should say about 80,000 from a traditional ira to a roth ira and it will still pretty much keep you in that 24 tax bracket over and over again. What we need to think about to make sure we have calculated correctly is that tax bracket 24 is a lower bracket than we think it will be in the future, so another consideration to think about before doing a Roth conversion is your taxes. state income taxes, so what we've been talking about so far is federal income taxes, but especially if you're thinking about moving, you need to think about what your state income taxes are today in the state that you live in. currently live and what they are. those state income taxes that you might move to for most of our clients, I would say you're probably moving from a higher tax state to a lower tax state or even a zero tax state, I think it's Another very popular move, it's something I personally plan to do. when I retire, but anyway, even if you're in Michigan here, where we have a four and a quarter percent state tax, or even if you live in California, where it's over 12 percent, moving to a zero per cent tax. cent is something you should think about because Again, when we talk aboutTo do a Roth conversion, we're trying to answer the question: Will you have a higher or lower tax rate in retirement than when you were working or when you converted?

So if you go to a low tax state, that's something that's obviously going to help reduce your overall taxes, so that's something to think about as you're making this kind of decision, now for the last thing. What I want to talk about here is something that came up here recently, where I talked to several clients who want to be super aggressive with their Roth conversions and I talked to one client in particular who wanted to be really aggressive with this guy. He had an account that was adding up to several million dollars and he was very concerned about taxes going up, so this guy felt that income taxes were going to go up a lot sooner rather than later and that they were going to start going up a lot and that It wouldn't be surprising if they went up if they started to hit the kind of income tax brackets that this individual was in or the ira account balances that this individual had because if the IRS is going to start taking on uh, trying to figure out how they can get more taxes, maybe multi-million dollar IRA accounts are a good place to start, you know, as far as maybe getting some additional tax revenue, let's look at an example, let's say you have five million dollars in a bank traditional. retirement account or it could be your 401k or a combination of all those accounts and let's say it totals five million dollars like we talked about in the first part of the video.

One of the things we want to think about is what that account is maybe. potentially it will grow up to uh throughout your life and in particular what it will grow up to that magical age of 72 years. So if we use the similar example that we started with and say if you're 62 years old right now if you don't take money out of that account, that account could be $10 million if it actually earned a seven percent rate of return, that's how the math works and instead of having to take out eighty thousand dollars a year that you add to your ordinary income, uh, in this case, four percent of that would be you would have to take a required minimum distribution of four hundred thousand dollars and that will be on top of everything else you may have, you may have other income from other investments, you may have a pension, you may have social security income, so 400,000 is there, if we look where falls within the tax bracket, that's already taking it to a much higher level, especially when we look back at the 2017 tax rates. once the jobs law tax cuts and rates expire at the end of 2025 So one of the things you may be thinking about doing and it's not a completely uncommon thought is to say "okay, I know that's the path and where it's going." I need to get this out of the traditional ira account.

I need to move it to an ira roth account and I need to do it as quickly as possible, so it wouldn't be unusual for someone to think, "Hey, I'm just going to convert." That five million dollars was moved today from a traditional account to a Roth account, and in fact, I'm sure a lot of people have probably done this and said, "Okay, I'll take five million dollars and move it to the Roth account." ". Rothside and then I will never have to worry about paying taxes on that money again and by doing so of course you will have a very large tax bill, as the tax rates are right now it will be most of that 5 million. will put you in a 37 tax bracket, you can say okay, well 37 percent is a better tax rate than the 2017 top tier tax rate, uh, which is 39.6 percent, so you say that okay, bill, what you've been saying is, in fact, that if I'll be in a higher tax bracket, uh, when I go to take this money out, like I am today, I should convert the money and maybe I should convert everything very quickly , so what we really want to see here is what we want. to talk about your effective tax rate and that will be something different than your marginal tax rate, so we are absolutely true and correct in saying that if we look at just the top line, our future tax rate on that money may be 39.6 vs. 37 percent, but actually not all of our taxes are going to be taxed at that highest marginal tax rate, so if we look at, for example, for 2021, we see that the top tax bracket is above 628,300 and whatever. above that number will be taxed at 37 percent, which means we have a lot of income up to that 628,300 level that is actually taxed at a lot of different rates, some of that money is actually even taxed to, you know, 10 and 12 tax rate, but again, anything above that, in this case, if we're converting a million dollars and again, this doesn't necessarily take into consideration what your other sources of income are, but just looking at the conversion.

Um, you know, a little bit less than 400,000 of that would be taxed at that 37 tax rate, whereas when we do a conversion, that's higher, even if we did a 2 million conversion or if we did, we're talking about maybe convert the 5. million of them, then most of that money will be taxed at 37, so that's what we have to think about and if we look at this and say, well, we have five more years of these lower tax rates, so we can spread that out now, hopefully there will be some growth in the accounts along the way, so those accounts don't necessarily have to go down to zero at the end of the five years, but even beyond that, even as we look to 2026.

If in fact that is the year we return to those old tax rates, you already know where your taxable income will be. A lot of times people think okay, we only have a limited window to do these Roth conversions, but actually, when we look. even maybe where someone would fall into your income tax bracket in 2026 and beyond, especially if 2026 is before you turn 72, when those required minimum distributions take effect, so that's one of the big types I don't want to say that there is a deadline for that, but that is one of the key ages that we reach so you know that if you turn 20 26 and you are 68 years old, you have four more years in those years in between where, although you can go back at those old tax table rates, you can still do a few more conversions in those years before you get to 72 and even 72, don't be afraid of that just because you get to 72 and have some required minimum distributions, you know, look What are those minimum requirements?

Distributions will affect your income over time, and again, you know this gets very complicated as we're looking at this with pencil and paper and doing manual calculations or even doing some spreadsheets, and again, that's why use the software that we use so that we have the ability to map this so that we can see, okay, let's put in an alternative scenario and see what a hundred thousand dollar per year Roth conversion does and what that is doing to you. reduce those required minimum distributions or, in some cases, when we have much larger ira balances, we're looking at doing, you know, three roth conversions of four and a half hundred thousand dollars each year, sometimes it's a million dollars a year, depending on how much you have in there, these are all the factors that we want to look at and what I advocate for is trying to smooth out or balance your tax rates over time and I think there are some people that you know that talk about the same topic that I talk about. and that I advocate for, you know, kind of front loading, you know, those conversions that you know in those early years, you know, 2020, uh, 2021, uh, you know until 2025 and you say, okay, that's our window , but actually you. you know, taking some of those big conversions to reduce your ira balance or 401k to zero within those five or six years you know, maybe it will put you in too high of a tax bracket that you may be paying, you know, 32 or maybe you could even pay. 37 tax and as we plan for it, once all your money is in Roth ira and you can get penalty free or, you know, tax free withdrawals from that Roth ira, we may find that it could go back to a tax of 25 or 28. group, you know, even if we go back to those old tax tables, so again it takes a lot to figure out some of these things, but I hope today's video gave you at least some of the important things that you want to think about and Don't feel like some people do that.

You have to know, do all of these Roth conversions in a very short period of time. For some people, that's what we have to do, but for many of us, we're looking at you. I know how to create balance over time, so anyway I hope you enjoyed the video. I hope you got some great information from what we discussed here today. Remember if you want to learn a little bit more about financial planning, go to richvisionplan.com there's really great information about the financial plan that we do and all of these things that we're talking about here are 100% covered within the financial plan that we do and we'll provide you with this roadmap for what your cash flow looks like, first of all, you'll be able to meet all of your retirement planning goals, you'll be able to have the cash flow you need to do all the things you want to do in retirement. , but you will also see that you know how.

That fits in with all the other important decisions you have for retirement, like when to take Social Security and how to best optimize it and whether or not you should do Roth conversions like we're talking about here, so anyway that's Like what you see there, click the little get started button. Answer some questions. You can schedule a call to talk to me and see if there is anything that might be right for you, so enjoy the rest of your day. and I will see you here soon in one of my next videos thank you