What You Should Know About ROTH IRA Conversions After Age 50 for Retirement

So when you're 50, you probably have a lot of money tied up in IRAs and 401ks that you've never paid taxes on and you realize that, hey, the tax bills will come when that money has to come out, so you might If you're considering a Roth Conversion, we're going to dive into that today and answer our listeners' question right after this, so like I said, if you're 50 years old and have a lot of pre-tax dollars, you might be considering doing one. Roth conversion. What that means is just making sure we're on the same page when taking money that's in an IRA or 401k and converting it to a Roth IRA.

Now the advantages of that are that any growth from that point forward is going to be considered tax free, we all like to be tax free and secondly, you will avoid those pesky

retirement

s, our required minimum distributions are MDS when You're 70 and a half years old, which is the government forcing you to withdraw the money, so one thing we think What it's all about is doing Roth

conversions

, but one of the negative aspects is that, let's say, you take a hundred thousand dollars, they're in an IRA or 401k and move them to a Roth IRA. What happens is you pay taxes on the amount of money you're rolling over to a Roth IRA to pay your taxes upfront, so let's say it's in the 28% range, that would be $28,000, where are you going to get the money to pay that conversion and get the potential benefits we talked about?

The way to do that is to take money from your existing IRA to pay for that and that's a question that David had, who is a listener of the show and heard me on other shows. Oh, by the way, thanks Whitney Hansen for the money nerd t-shirt. she's the host of the money nerds podcast you can see that so

what

David asked was she said I'm 53 and I'm considering starting to do

conversions

to a Roth IRA so she's a little ahead of the game good job David. but he says he would prefer not to pay it with my after-tax assets.

Can't I just take my portion of my IRA and pay the taxes due on the conversion? Well, yes, you can do that, David, but here's the big problem, because if you're 59 or under 59 and a half, that's considered a taxable distribution, which means if you do that, if you pay the tax owed on a conversion of your IRA assets, you will have that 10% penalty as an early withdrawal, so you can do so. it changes the dynamic and probably isn't the smartest decision, and even without the 10% penalty overall, in my opinion, it's not particularly smart to pay the tax with actual IRA assets, better to pay with the application later tax, assuming you have That way, you keep more money in the Roth growing tax-free without the required minimum, that is, minimum distributions for a long time, so yes, David, unfortunately, if you are under fifty-nine and medium, you will have to pay the fine if you do that.

Now David's second question is: Well,

what

if I'm 63, I stop working, and I start doing some Roth conversions, which is something that a lot of people think is not a bad idea? He wanted to

know

if I have to have income to be In order to do that, I have to show some type of taxable income to be able to do a conversion and well, the answer there, David, is no, you don't have to have reportable income to do a contribution to a Roth, but no. You don't need to have reportable income to make a distribution, so you're fine.

Now let's dive into this idea of ​​doing Roth conversions later in life. It gets a little more problematic because what ends up happening is so let me explain to you because I've done some analysis on this, you

know

, usually in our mid to late 50s we think I have all this money in 401k and IRA and I'm probably not going to touch it for a long time, which means that I will get the minimum required, just end the abuse and they will force me to start withdrawing money. I think today it's about 3.6 percent and it's increasing every year and I have a lot of clients that are taking required minimum distributions and they're not doing it.

They even need the money, they don't have it, they have other assets and other sources of income to provide a good problem, but it's still a problem, right, you think you're in your 50s or 60s. Well, what happens if I start converting to a Roth IRA? I'll be tax free forever after that under the rules and two, I won't have to deal with required minimum distributions, it's not worth paying the tax up front to do that, so the way you look at that decision is very complicated. . times you go to a Roth conversion calculator, I'll put one in a link below just to show you what a normal one looks like and run the analysis to see if it makes sense.

This is one of the problems that I ran into because What you're going to do is say, "Okay," I'm going to convert, let's say, a hundred thousand dollars. I'm going to pay twenty-eight thousand dollars, as an example, on my taxable investments. How long, based on a growth rate, until breaking even? and get my taxes back and I'm actually ahead of the game that the growth rate is a pretty key assumption in that equation, so let's say you're being reasonable, you say, well, let's assume it's a growth rate of the 7%, okay, I'll do it. aggressive with this, but little assumes a 7% growth rate and you run the calculations and it will give you your breakeven point when this Roth conversion made sense.

Well, here's a big problem with these one-dimensional calculators is that when you enter 7% as your assumed growth, it will be assumed that you earn 7% each year 7 percent 7 percent 7 percent do you ever get investment returns like those when you invest in stocks and other things? No, even if they average 7% over a long period of time. you rarely even come close to averages now, the way we work in the real world is uneven you get twenty percent you get fifteen percent you get thirteen percent or you get minus eight minus five three percent and that creates the average why am I bringing?

This is all because when you are considering doing a Roth conversion, when you get those returns, they will drastically affect the usefulness of doing the conversion and make it worth it. I think those simple calculators drastically overestimate the value of doing them and The last time I looked into this was a little bit ago, but I was a high net worth client. When we took into account the fact that returns can be all over the place and did a Monte Carlo analysis, it was nowhere near as successful as you originally were. We thought it was and we realized that it made sense if it really was multi-generational money, which happens a lot of times, it could be because it has a very long period of time to run and that's a great way to transfer assets and stretch IRA accounts.

Like, you have to be careful with those calculators, so how do we deal with this problem with all this money in pre-tax accounts once we retire? Well, one way is even if you don't need the money to live. Once you retire, you can start taking distributions from your IRA, pay taxes early, and manage what your taxable income is so you can minimize taxes and because, in theory, you'll be in a much lower tax bracket right when you retire. for power year. per year, determine how much you are going to withdraw from your IRA and put it in your taxable account to manage your tax rates, try to minimize that tax impact over your lifetime and if you don't need the money for insurance you can take out a little each year and you have to do the calculation each year to manage your tax rate and instead of putting it in a attack count, convert it to Roth and slowly increase your Roth over time.

I know this sounds like it's a complicated topic and it just takes a little intentional planning using a multi-dimensional approach to get to the answer so you can make sure you diversify your tax brackets so you can be as efficient as possible in achieving an adequate

retirement

.