This broadcaster has 82 podcast archives available on-demand.
Keep up-to-date with this broadcaster on social media and their website.
January 30, 2018 1:00 am
Is a Roth conversion a logical move for you to make or not? John breaks down the pros and cons of converting money to Roth in various situations.
It's time for another edition of Mr. Stillman's opus for personal coaching today with John Stillman, the founder of Rosewood wealth management junk too much excited for our conversation today. How exciting can Roth conversions B12 will make it as exciting as they can cost were to answer some important questions about Roth conversions. What you need to know about them, and so will start their job. What is a Roth conversion that sounds like Greek to some people. Others have maybe been through this before. Yet a lot of people have heard of it as a strategy that is maybe a good thing to do and a lot of cases it can be good thing to do, but of a Roth but don't know you can convert right so essentially let's let's first lay out the difference between traditional and Roth IRA very quickly so traditional IRA. You put the money and now you get a tax deduction this year.
All that money grows and you're going to be taxed on what you take out as ordinary income. When you take it out, so all that growth is going to be taxed with the Roth you put it in you get no tax deduction. Now that all the growth is tax-free so you put in 5000 now you still pay taxes on the 5000, but a gross 200,000 was 95,000 that you can take out and pay no taxes except the paying the tax on the seed or the growth right so the harvest of the crop or will do so.
So Roth would be your paying tax on the seed traditional IRA your paying tax on the hardest parts.
Basically every tax advisor in the world uses that analogy to describe the difference. So let's suppose you wake up one day and you find yourself with $100,000 in a traditional IRA And you say all right well I'm only 30. This will probably grow to 500,000 before actually needed for retirement.
Sure would be nice if that hundred thousand was growing to 500,000 tax-free instead of me paying taxes on the whole 500,000 some what you would do is convert that to a Roth.
You do a Roth conversion converting that hundred thousand dollars of traditional IRA money and converting it to Roth. So you pay the taxes on it now so you're saying I'm paying the taxes now on the account. Does that mean my balance. It comes out of the balancers that just come from a death different path.
Good question. So let's say you have that hundred thousand in a traditional IRA you want to make it a Roth yes that's going to be a little and say you're in a 15% tax bracket. When you do that you're incurring about a $15,000 tax bill in order to make that happen.
You're going to want that money to come from somewhere else to pay the taxes you are going to take it out of the account because you're likely going to incur to pending on your age likely going to incur some kind of penalty got to do that and now your anticipated growth in that account. You're hamstringing that growth by pulling it out to right so if you are converting hundred thousand dollars in your paying 15,000 in taxes to do that you want to have that 15,000 in a banker after-tax brokerage account somewhere you can pay the taxes with.
So let's suppose you do convert that hundred thousand dollars and that does grow to 500,000 for you need it when that's great you paid $15,000 in taxes at the time of conversion, but now it grew $400,000 from that point, and that entire $400,000 you could take out tax-free. So that's a pretty big benefit if indeed it grows that much if you had never converted and you left it in. I guess the differences than 15% of 500,000 not 15% of hundred thousand and assuming you're in that same tax bracket at that time but yet exactly right so it's pretty obvious to see why you might want to do that. Why can it be especially helpful for people who are high income earners and I've heard that before, so there's something called a back door Roth and it's really all it is is a Roth conversion. It's just that it's gotten his name back door Roth because it's a way for people who can't otherwise have money and a Roth IRA to get money Roth IRA. So if you make too much money. According to the IRS and it's no married filing jointly.
Right now it's about $185,000 adjusted gross income you have more income than that, as a household, you cannot contribute to a Roth IRA. So what that means is you could only contribute to tax deferred investments, 401(k)s or IRAs.
Or, you know, if you make too much even more than that. You can't even contribute to a traditional IRA and get the deduction. While there is really no income limit for the 401(k) so you can always put your money in there but if you want to have some money growing tax-free for the future. The Roth is a very powerful tool to do that we say art will I do and I'm precluded from doing that because I'm a rich person who has to be punished so I'm not allowed to put money in a Roth.
Well, there is no income limit at least as tax laws stand now, there is no threshold for converting to Roth. You can convert money to Roth at any time as long as you can pay the taxes on it. So let's suppose you're somebody who made $200,000.
You're making too much to put money in a Roth or you could put that money in a traditional IRA in the next year you converted terrazzo so you put in your $5500 that year into a traditional IRA.
The next year, you converted to Roth.
You're going to pay taxes on that money that you contributed now is growing tax-free from this point for that's what caused the back door Roth, way around the tax law, one perfectly legal and I haven't really even heard any talk about them changing the law. So our assumption is that for the foreseeable future.
That'll still be a strategy you can enact that'll be helpful.
I was find examples to also be helpful. John, can you maybe give us an example of how you seen this in your practice at Rosewood wealth management. An example of a person who maybe would really benefit from a Roth conversion and you identify that when they came in.
So let's let's think about somebody in their mid-40s. This was Kim. Kim had a situation where she basically gotten an inheritance that was a pretty substantial amount of cash was like it was the sale of her parents home so she had $75,000 that plopped into the bank after was split between her siblings and antics, so she got $75,000 in cash. She had herself an old 401(k) that had about $200,000 in guy.
She was also in the situation where she was without a job. That year she was in between jobs And she gotten a severance package the year before that.
It all paid out. This is probably more detail than you need, but long story short, she wasn't going to have any income this year. She was having off money that she had in the bank from a severance package from a job previously. So, in her case she was able to take that $200,000 and convert it to Roth. Yes she can pay the taxes on that $200,000 as income as if it was earned income this year, but because she didn't have any other earn income that year if there was ever a year for her to do this. It was that particular year. Otherwise, the tax bill would've been so huge if you done during a normal working year right and so in converting that $200,000 she incurred a tax bill of around $40,000. Well, with that 75,000 she'd inherited she could pay the taxes on that and now she's essentially cleansed her money or hate that 200,000 is now growing tax-free down the road. She's 45 she's not going to need that money for 20 years, when she retires and so hopefully that money will have doubled, tripled or quadrupled. By the time she gets around the meeting so she took a $40,000 tax hit. Now, but for the purpose of having a gargantuan tax-free account. Once she retires the instant gratification versus delayed satisfaction debate that we always have. Yeah, it's good later way to phrase it may be an example would be helpful. John, the person who is on the other side of the coin who shouldn't do a Roth right well and generally speaking, the older you are the lessons going to make sense. So Mike and Jill were really excited about the idea of a Roth conversion. But when we looked at their situation.
It didn't make as much sense. They were both in their early 60s and they really were planning to retire in five or six years so they were looking at converting money to Roth paying taxes on it now and letting it grow tax-free.
But they needed the money in a relatively short period of time. So, one problem was they didn't have all that long for the money to grow before they needed stomach. The 30-year-old who had the hundred thousand dollar planet was integrated 500 exactly in the benefit of the Roth. As you'll remember, is the growth is tax-free. So if you don't have that long for the money to grow. There is limited benefit there. The other problem was, as I said there both in the early 60s. They were both in their prime earning years. So they're making as much their earning as much as they ever have and now were going to do a Roth conversion and add even more income on top of that really didn't make any sense in their case so you know if your under 50. There is a good chance it makes sense for you. If you're between 50 and 60 ill. It really depends on your situation. If you're over 60. Very rarely is it going to make sense to do a Roth conversion.
Those are very general age brackets there, but that's kinda how it breaks down on average.
Is this something if I do kinda hear your explanation John and think you get the sounds like it would probably be good for me or at least to explore investigator yet gung ho I feel like I fit right in the this good spot here is, it is easy just go in my Fidelity account and click a button and make it happen what what are some of the pitfalls of trying to execute the strata.no, it's usually never that simple and you pretty much always want to have a CPA involved in the process, even if it's a relatively small amount because there are a lot of things you need to account for exactly right on your tax return and if there is something in your situation that makes it unwise for you to do this Roth conversion. You're probably not going to find that thing just by reading some articles online or even listening to a podcast route you you will have some good tax advice along the way so it is a little bit complex and it's a fairly simple concept but all the record-keeping the paperwork that goes along with it that you probably do want to have some professional help there not to go down a long path here because this is probably more detail than anybody wants to get into but just I think is a good example.
The right answer for somebody might be. You've got 1/2 $1 million in an IRA and the right answer for you might be half of it stays IRA half of it converts to Roth but it's on the same account and try to figure out the proper paperwork and tracking.
For all I can stuff you can see how complicated and and ridiculous that might get if you aren't used to dealing with those kinds of procedure in that door that you opened up right there is one of the complexities that I only want to try to get into on here because it is so complex.
But yes could be the right answer. If you're trying to convert part of an account does become very problematic gap said that's just a good example of some of the ways in which you can get some outside help, rather than just trying to figure it all out on your own if you have questions about a Roth conversion does it indeed make sense for you. Is it something you should consider John can help you out. Certainly at Rosewood wealth management to give him a call at 919-391-3446 again 919-391-3446 or always email@example.com that's Rosewood wealth management.com extra paper should help always pleasurable for death Roth conversion that helps young little bit for John Stillman, Crystal talking. Next, Mr. Stillman's opus