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Roth IRA Conversion Up To A 24% Tax Bracket

Finishing Well / Hans Scheil
The Truth Network Radio
November 23, 2024 8:30 am

Roth IRA Conversion Up To A 24% Tax Bracket

Finishing Well / Hans Scheil

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November 23, 2024 8:30 am

Hans and Robby are back again this week with a brand new episode! This week they discuss Roth IRA conversion up to a 24% tax bracket. 

Don’t forget to get your copy of “The Complete Cardinal Guide to Planning for and Living in Retirement” on Amazon or on CardinalGuide.com for free!

You can contact Hans and Cardinal by emailing hans@cardinalguide.com or calling 919-535-8261. Learn more at CardinalGuide.com. Find us on YouTube: Cardinal Advisors.

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This is the Truth Network. Welcome to Finishing Wealth, brought to you by CardinalGuide.com with certified financial planner Hans Scheil, bestselling author and financial planner helping families finish well for over 40 years. On Finishing Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now let's get started. Let's get started with Finishing Wealth. Welcome to Finishing Wealth with certified financial planner, Hans Scheil, and today's show, How Fun.

We're doing Roth IRA conversion up to a 24% tax bracket. That's kind of a mouthful, but we are following along in this series with Tom and Chelsea, and you might remember it's Dr. Tom. And I, you know, to give you a hint on what we're talking about, I was noting that over what we're going to discuss in the software that Hans and Tom use to help people with their financial plan, that they saved this man, you know, over well over a million dollars in tax taxes based on the strategy that we're going to talk about here.

But the overall idea just hit me that, man, here is a doctor and clearly he saved, as you'll see in the example, he saved over $3.5 million before his retirement at 65. And yet he has the humility, right? I mean, he's obviously got his act together.

He's obviously a good steward. However, when it came time for this kind of thing, he still has the humility to come for advice and not go with the common understanding, that kind of thing, which I'm sure Hans will explain. But it just occurs to me, how many times a day do I not humble myself to go to the king of the world and say, Lord, I need to help.

I'm not sure. I mean, I think I know what I'm doing, but I'm just not so sure I know what I'm doing. You know, ask for your help Hans.

Well, yeah. And I can talk for a sec about what stops people from, first of all, having your guard up out there in the world when you put together some retirement assets is probably a good thing in the sense that, you know, it stops you from getting swindled or somebody giving you real bad advice or some sort of scheme or that kind of thing. So, you know, the message here is don't have your guard up. But the other message that you brought up and that works well for them is that you've got to submit to somebody if you're going to, like us or somebody like us, has got to help you and give counsel to this very smart person. And so what I'm trying to say is that people are reluctant to do this with anybody. To know us pretty well before they even call us has just been a real blessing because people really want to do this.

They want to lay all their cards on the table and they want to say, this is what I've got. This is what I'm worried about. And this is what I would like to achieve in retirement. Can you help me do that?

Or can you show me that I'm on the right track or the wrong track? I mean, that's a lot of vulnerability. And it's so joyful that people actually come do that with us in numbers. And I think part of what that's doing, doing that in our practice is the fact that we have the shows on every week. And we send out a YouTube video every week or we post it.

And we've just got a lot of people are watching 20 to 30 videos or listening to shows for a year or two before they have the courage to come say, here's my stuff. Tell me what you think. So pretty cool that you would observe that. And I mean, I'm just thankful and I think it's cool that it's happening.

So today's show, we're talking about, it's the second of four. So last week, we talked about their income plan for Tom and Chelsea. And just for a little bit of review is they've got $2,500,000 in a tax-deferred IRA, which sounds like a huge amount of money, and it is. But you just, with the stock market, what it's done over the last 15 years, there's a lot of people, I don't know how much they had in there, but I'm going to bet that they had $600,000, $700,000, $800,000 15 years ago. And they're just here at retirement, it's $2.5 million. And they've got $750,000 of taxable investments, money that's not in an IRA, $230,000 of cash.

And you just look at that, you're looking pretty good. But Tom and Chelsea are smart enough to know that with their lifestyle and their giving and all the things that they do, that may or may not be enough or their decisions have a big effect. This needs to last for 30 years, along with Social Security. And so where we met them with a current plan, which is very typical, is they really almost had no plan. I mean, they had a great plan for accumulation because they wouldn't have so much money, but their plan for retirement was they were going to both start their Social Security right away because they were going to have nothing coming in, and that would be something.

And they're both 65. They were going to start spending and supplementing the Social Security out of the post-tax money to keep their taxes real low so they could just allow that IRA to keep growing. And they were going to pay as little tax as possible. Now, just keeping the nest egg growing until they met us. So in the proposed plan, we kind of turned it upside down. We got them delaying Social Security.

We're going to be doing another video on that. This is in the coming week, but we got them delaying Social Security until 70. So now you'd think, well, they got no money coming in. But what we did is we purchased a single premium immediate annuity that was going to pay them for the first five years. So during this five years of delay of Social Security, they're just going to be getting a Social Security check from another place. And we bought that single premium immediate annuity, paying them $12,000, $500 a month for five years. It's just basically giving them their allowance to spend. And we bought it with post-tax money. So they're really living on almost paying no taxes on their income.

And you're thinking, well, why are you doing that? Well, we wanted to be able to do Roth conversions. So it's going to leave a lot of room to start chipping away at that $2.5 million of pre-tax money. And then that's what this video is about, is about the Roth conversions.

And there's a right amount to do and there's a wrong amount to do. You don't want to go overboard and convert too much in any one year because this is going to push you up into high tax brackets. On the other hand, you don't want to convert too little because you're leaving money on the table. You're leaving low tax rate converted money on the table every year that goes by. So the sweet spot for a lot of these people is the 24% tax bracket or the top of that.

Right. Well, just to slow down for those who, like me, don't have that much of a grasp on the idea of what we're talking about IRAs are, as Hans has explained, is pre-tax money. In other words, we put that money into it, but we didn't pay income tax on that money as it went into it. And so Uncle Sam is your partner and at some point in time you're going to pay tax on that.

And I'm sure if you have a large one of those, you understand that. However, if you have a Roth IRA, which is a different obviously thing, then those are after tax dollars. And as those grow, you have the benefit of both the increase is not taxable. Plus if you get money out of it, then it's not taxable. And you can certainly save taxes over the year, but over the years, and this is the way you're going to increase your income over those. But the neat thing about the conversion that doesn't sound so neat to begin with is obviously it's getting the money out of there while the tax rates are low. So that the money will go into the Roth, coming out of the taxable IRA, into the Roth IRA while the interest, while the interest rates, excuse me, while the tax rates are low.

How did I do explaining that Hans? That's really good. So we've done a lot of videos on how you're going to have this 2026 tax sunset, or in other words, the Tax Cuts and Jobs Act of 2017 had an eight year life. And then the taxes are going to go back and they're going to go up in 2026. That's the current law. But that was before we just had the election. And now we've got a new administration, or we're going to have a new administration, and a new president, and somewhat of a new Congress. And the talk is that maybe they're going to extend these tax cuts out even further, which is great news.

It doesn't make everything we've been telling you wrong. First of all, it hasn't happened yet. But if it does happen, then that'll mean Roth conversions will be even sweeter into the future. So, you know, what I really want to get across is that people that have a large IRA and they haven't paid the taxes, they think they're getting away with something by postponing taking money out of there until they're 73 when they're required to. And they think they're getting away with something by delaying it because they're not paying any taxes currently. But they're just inflating and creating a future problem that somebody is going to pay taxes on that money. Either you or your heirs are going to inherit a big tax bill. So what we try to do for people is, first of all, we want to make sure that people buy into this whole concept, because some people don't necessarily agree with it. And we still help them. Some people just say, well, I don't believe in paying taxes now to save on future taxes.

I'd rather just keep postponing them as long as I can. Well, then we have a way to our job is to serve the customer. So we're not going to force this on every client that comes in the door.

But through a process of explaining and how it works and what we're thinking about, we make sure that the people are on board. And once they're on board, we're going to optimize this thing to reduce their lifetime taxes and even after lifetime taxes. And in this example, we were able to save Tom and Chelsea, if they both lived to 95, an average of over a million dollars in lifetime taxes. This saved Tom and Chelsea and their heirs, which is pretty impressive. Yeah.

And it's super impressive when you watch the video, which we couldn't recommend high enough. If you go to CardinalGuide.com, CardinalGuide.com, look at the seven worries tabs. Of course, this is under IRAs. And then you would be able to see how this software works. And literally you dial in your money, your investments, you know, what's pre-tax, what's post-tax, you know, when's your Social Security coming in, all these things. They put all this into this software and then, oh my goodness, they can adjust these things and show you all sorts of different beautiful plans right in front with your money. Well, it's a good point to remind you that, of course, this show is brought to you by CardinalGuide.com. And if you go to CardinalGuide.com, as we said, there are the seven worries tab and the worries that we're talking about today, hopefully won't be if you click that tab and watch the video again in this same Roth IRA conversion under the IRA tab. And of course, Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, and of course, the contact information that's all there at CardinalGuide.com.

We'll be right back with a whole lot more on Roth IRA conversions up to 24% tax bracket. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency.

Roth IRA conversion up to 24% tax bracket TC-204 is approved with the addition of the following disclosure. Index on fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.

Please refer to our firm brochure, the ADV 2A item 4 for additional information. Welcome back to Finishing Well, certified financial planner, Hans Scheil. Today's show is Roth IRA conversions up to 24% tax bracket. And wow, it's pretty amazing, right, when you can save somebody a million dollars. And like you said, they're heirs. It's not just them, it's their whole estate, right?

Well, it's something. And so what we're talking about here for some of you just tuning in is we've got Tom and Chelsea, this couple that's both 64, just turning 65. And we're doing four videos, all four using the software that is sitting behind our financial planning. And the first one put together a retirement income plan. I'd suggest you watch that one. You'd go and find the video.

You can get it either on YouTube or you can find it at CardomeGuide.com. And then what we're talking about today is the Roth IRA conversions for Chelsea and Tom. And so what we're doing is trying to reduce the lifetime tax on a $2.5 million IRA that's all pre-taxed. These folks didn't have any Roth when they met us. And the first thing we have to do, as we said earlier, is they need to buy into the whole concept, Tom and Chelsea do, of the whole idea of Roth conversions. Because it really stings to pay a bunch of taxes now that you could postpone until later.

But the thing the software does for us is by the time we put in a recommendation, and the software helps us with the recommendations of the amounts, and it runs all the scenarios and we tweak them a bit. And the outcome for this couple is they were going to pass away at 95, one or both of them. One of them might have passed away a little earlier. And with an average of over $7 million doing the Roth conversions, but that's $1,113,069 larger because of the Roth conversions. And it just works out that people that don't do Roth conversions that have these large IRAs, what happens to them is the investments perform over time and they're not pulling anything out of it until 73. Then they just pull out the minimum and this money just grows and grows and grows to the point where the required minimum distributions become so large and then the tax on them far outweighs paying the earlier tax and then having tax-free growth. So you really have to look at it with the numbers and the computer running the numbers to really see these benefits. And one of the huge benefits to me, when you explained it and I've never forgotten it, is here comes this balance and it's growing and growing beautiful.

How exciting, it's growing. The challenge is as it grows, then you're having to pay the tax on the growth if it's in a traditional IRA. But if you'd made the conversion to a Roth, not only are you taking the taxes off at the beginning with a lower rate, but then as you continue to see that growth, ka-ching, it's growing like crazy and it's growing tax-free and obviously that you can take that out without having to pay any tax on it.

Well, yeah, you can. And then what's happening with all that growth on either side or on the tax, the pre-tax side, like if you're not doing Roth conversions, now you've got minimum distributions like when you're 80 years old of like 6% in a given year or in your early 80s. And all of a sudden you've got this big balance and now you're paying tax on 6% of it in one year.

You get up to 90 and those minimum distributions are like in the 20% range. And you start adding that up, the taxes that are paid by these people are huge. And then even though they still have a huge amount in there, then when they die, it goes to their kids and then their kids are paying a lot of taxes on it. So like I said, we don't overly sell this to people. We get them on board in the beginning or not and the people that are on board, then we show them the optimal level.

And we don't convert all of it because we still want to leave some in there. You do QCDs out of a pre-tax IRA. So people that are very charitably inclined and they want to give to the church or give to another charity or a combination, you want to leave a bunch of money in the IRA.

And Tom and Chelsea have done that in their plan as they've pre-thought through. When they turn 70 and a half, they're going to do qualified charitable distributions out of the part we don't convert. We're just talking about a lot of the money is going to be converted and then it's going to sit there so they can live off it when they're older if they need to, tax free. And then that's the big hunk of money that we're going to pass on to the kids, tax free.

And when you did it on the software, it was really, really cool. They show a chart or a graph, I guess a better way to put it, and it shows here's what happens if you pay the tax at the 24% bracket like we were talking about in this example versus here's what happens if you wait. And it showed just beautifully here's this front-loaded thing and then you got no tax essentially for a great big long line of this graph while the other one, if you'd left it in a traditional IRA, I mean you could see that thing was going higher and higher and higher and higher.

It seems like the longer you live, the worse it gets. Well, yeah, and it's hard to call that worse because it's money compounding at great rates, okay, and even with those required minimum distributions, it's just compounding and compounding and compounding, but it's a big tax problem to leave to your heirs. Yeah, it's a big tax problem for you if you have to start spending it. So anyhow, this was what they wanted, and we really were living off a lot of the after-tax money for the first five years just to pay them their spending money, pay themselves their spending money until Social Security started. And then once Social Security is coming in, which is pretty big for them, then we're supplementing that out of a mixture of pre-tax and post-tax money and having them pretty much in lower tax rates from then on except for the fact that we're doing Roth conversions for six, seven, eight years. So you plug all this stuff into the software, and they end up in a better place with a whole bunch of money that they've already paid the tax that can grow tax-free and then pass to their heirs tax-free.

People start looking at all that, and it's very nice to them. So can you speak to the 24% issue? Yeah, it's about $380,000 of combined income, which is the top of the 24% bracket for a married couple. And then for a single person, it is about $190,000 is the top of the 24% bracket. And you can see right there that while you're both together and married and one of you hasn't passed on yet, that's another reason you want to be doing Roth conversions. At 65, well, you're both kicking and doing well because when one of you passes away, it's going to be harder for the survivor to do these Roth conversions because they're going to be filing as a single taxpayer.

So that's the amount that you're paying 24% federal tax on the last dollars, and that's going to be after you took the standard deduction. So you really could take it up to about $410,000 of income that we can plan for doing Roth conversions. And then their example, they're paying very little tax on the stuff they're creating their income out of. So we can just literally convert about $350,000 a year for the first five years, and that's going to get a whole lot of their IRA converted.

Right, about $2 million. And so it's a pretty complicated subject. It becomes less complicated when we put people's own money in the software and then we have them looking at it while we're creating the plan. We've already done a lot of work by the time we get them looking at it, but we do that. And it's not just on Roth conversions. We have them look at the whole thing and show them what we're talking about before we get the whole plan done so that they can give us some course correction if they don't like something they see or there's something they really like and they want to do more of it. Right, and you were explaining to me that really you can up to 10, like if you only had 10% of that $300,000, all these things still are very effective. In fact, maybe more effective for you because you got less margin for error, right?

Well, yeah. I mean, it's just every client's different. So we put together the standard client here in Tom and Chelsea and the standard well-to-do client, and we have a lot of medical doctors that just maybe they just watch YouTube at night. I mean, they're so busy that it's something, it's easy for them to do is to tune into our YouTube channel and watch a bunch of videos. And it's interesting that a lot of them make the comment that they're not even learning so much the facts and the figures so much as they're just assessing Tom and I. And they're just seeing if we're, you know, what they think of us. And a lot of these people that come into us, they're all over the board. I mean, they – and there's a lot of people that come into us that we don't recommend Roth conversions for whatever reason, and there's plenty of whole list of them. So I don't want the listeners to get the idea that everybody that comes into us, this is the plan we recommend to them.

Right, right, right, right. Well, I guess this is a good point to point out that, again, this show is brought to you by Cardinal Guide, cardinalguide.com. And there, if you get there, you're going to find the seven worries tabs. One of these is the IRA tab. And if you click on that, you're going to get to see this video we've been talking about, the same title, Roth IRA conversions, up to 24% tax bracket, and that amazing software.

And you get to watch Tom at work and get the idea of what it would look like to have your money in that situation. Of course, you can also find the contact information for Hans and Tom, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. I just – you know, so fascinating, so wonderful stuff. Hans, I'm so grateful for your work. Thank you very much, and God bless you.

God bless. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and The Workbook. Once again, for dozens of free resources, past shows or to get Hans' book, go to cardinalguide.com. If you have a question, comment or suggestion for future shows, click on the Finishing Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.
Whisper: medium.en / 2024-11-23 10:23:45 / 2024-11-23 10:34:03 / 10

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