The 5 Best Times for a Roth Conversion

Four. Peter, good to see you. Welcome back, everyone. Today, we're going to talk about the five best times for a Roth conversion. Retirees who want to reduce their taxes in retirement can benefit from strategic conversions, and identifying those key windows for Roth conversions can lead to significant tax advantages and, of course, a bigger nest egg, which is what we all want.

So, let's talk about time number one: that is during market downturns. We've talked about this recently, Peter, but explain why this makes more sense in a down market. Yeah, well, we've talked about it recently because we've sort of been in a down market here. You know, in the grand scheme of things, it hasn't been a huge catastrophic pullback. But if you plan proactively and are well prepared, then you can identify opportunities in the midst of chaos.

When everybody else is sort of worried and panicked, you execute on strategic planning like a Roth conversion. And just for round numbers, let's say you pay 10%. you Tax. I know that's pretty low, but let's just say you pay 10% federal tax. If you have a $100,000 tax-deferred IRA balance and wanted to convert that over, well, you'd pay $10,000 in taxes.

If the market, however, went down and your account balance turned to 80%, nobody loves to see it, but you say, hey, this is a strategic moment. I can convert over 100% of my balance now for only the cost of $8,000. Or you could convert over even more of the balance for the same price.

So if you were prepared to pay taxes proactively, saw this downturn and wanted to move those dollars over so that the recovery happens tax-free, it is a silver lining on a gray cloud. It is an opportunity within some chaos and some downtimes to make good strategic moves. Yeah. And by the way, when you say larger account balance, you know, that's not necessarily the case because when we do do the Roth conversion, we're going to. To pay the taxes on that, you've got to be aware of that.

Yes, yes, very good point. All right, time number two is in anticipation of tax bracket changes, and taxes are set to increase at the end of this year, 2025. Yeah, and I know there's been a lot of talk about extending these lower tax rates.

However, asterisks in bold, as tax laws stand right now today, taxes are slated to increase. The 12% bracket becomes the 15% bracket. The 22 becomes the 25, the 24 becomes the 28. You know, this is on average about a 16 to 18 percent increase across a married couple's first $200,000 of income. And that lower bracket, the 12 moving to the 15%, that's not a 3% tax increase.

That is a 25% higher bill.

So when do you want to buy something? When it's on sale, if you go into the department store and you see two racks, one is marked 25% off and it's gotten. identical item on it and you say hey i i like that item why would you pay full price you you buy it off of the sale rack now in a department store i'm a frugal shopper i end up picking it up and saying i don't really need this and then i i put it back um but taxes are a compulsory purchase you have to pay them sooner or later if you don't pay them your beneficiaries will they will be paid at some point the irs is never going to forget that you have not paid taxes on those accounts yet so why not pay them when they are on sale and guess what even if these uh 2017 tax uh cuts and jobs act rates do get extended retirement is 30 years and or more and and we have a change in leadership every two years in this country you've got to worry about the next 15 to 20 election cycles and what is going to happen with taxes when over the last 15 to 20 election cycles we've gone from a debt Of under $8 trillion to now over $37 trillion. And it's not slowing down, folks. And where is that going to be paid for eventually?

Probably from retirement accounts. All right. The next time would be between retirement and RMD age when you're done working, but before you're 73 for most people, you may have lower taxable income. Yeah. And Ed Slott is America's leading IRA expert.

He's hosted PBS specials. He says that this is the window of opportunity. And thankfully, that window extended a couple extra years when they moved RMDs back. Look, RMDs required being the first word, minimum distribution. If you default to RMDs, you are deferring to the IRS's plan for how to collect tax dollars.

The IRS's plan is probably not the plan that is in your best interest and most effective for you.

So why not use this window of opportunity between 59 and 90? A half or retirement age, and where those RMDs start, even if you don't need the income to take the income, pay the taxes, and convert those dollars over to a tax-free account in a Roth. And by the way, when I mentioned that it'll be paid out of retirement accounts, it's not just retirement accounts, but there's a lot of yet-to-be-taxed money.

So, retirement accounts, just like brand new income, is where the majority of taxes get collected from. And so, why wait until the IRS says, hey, it's your time, we're going to require minimum payments on this, rather than being proactive and bringing that down, that bill, that tax liability down as much as possible and controlling it and keeping more of your money. One of my favorite slot lines is an IRA is an IOU to the IRS. IRS. Yep.

Yep. Yeah. That's one that we use often in this industry. There are a few names like in this industry that are well known that if you're not in the industry, you might not pay attention. Ed Slot is a remarkable mind when it comes to the tax code.

When it comes to IRAs and how and when to handle the taxes with them. All right, the fourth time to consider a Roth conversion would be if you are experiencing a low-income year. Yeah, and this happens, right? Every once in a while, there's some year that's sort of an anomaly, and you say, oh, well, I'm not going to have as much income this year. Maybe you changed jobs, maybe you lost a job, maybe you retired and you're between opportunities, you know.

There are reasons why sometimes we have lower income years.

Well, that means lower income tax brackets and rates potentially. Why not use that as an opportunity? Again, it may be a little bit of a salt in the wound kind of situation to say, well, I've got lower income and I'm going to pay extra in taxes, but long term, effectively, it is. Generally, going to be probably beneficial for your planning and your outcome to go ahead and utilize those lower tax rate years to pay off. more of your lifetime and legacy tax bill.

Mm-hmm.

So I'm glad you mentioned legacies. I know you're always thinking about the family, Peter. And the fifth best time is when you want to leave a great financial legacy planning for your heirs. Yeah. And by the way, no, no order of priority here, one through five, but I hear people all the time say, I'm too old for a Roth to make sense.

Well, if you're not going to use those dollars, then they're going to be left behind. To someone, you know, you whether you go up, down, or sideways, wherever, the money stays here. And if it hasn't been taxed yet, the IRS is waiting to get their hands on it. And when it passes to the next generation, there are some requirements that it's got to be liquidated within a certain amount of time. Generally, this bumps those recipient beneficiaries up into even higher tax brackets.

And oh, by the way, they probably are in the midst of their highest peak earning years themselves.

So now we've got extra taxable income. Look, if you just want the IRS to be your biggest beneficiary, then continue to defer and not pay the taxes. But if you would like your loved ones, your beneficiaries to get the lion's share, then I don't think that there is an age limit on where the Roth stops making sense because it is a legacy play as much as anything. Passing those assets to the next generation, if ultimately that's going to be Be the use of the money, that it creates a legacy, then be as tax-efficient with that as possible. And people worry about estate taxes.

Oh, I'm going to encounter estate taxes, or am I going to? The estate tax limits currently are so high, that's not a concern for most people. If it is, we have different conversations. But for most people, though, the bulk of what is being passed is. Not yet taxed retirement dollars.

And so before we worry about estate taxes, we haven't even paid income tax. Yet. And again, kind of behind the scenes in the industry. We talk about the great wealth transfer that is about to occur as one generation transfers their wealth on to the next generation. Unfortunately, I think a lot of that great wealth transfer is going to be transferred to the IRS because people are not planning effectively to the IRS and nursing homes rather than the intended beneficiaries because people are not planning properly and proactively to control the ultimate tax liability that will be paid in their lifetime and on their legacy and to protect themselves against long-term care expenses.

That's a completely other episode that we would need to talk about that. But yeah, that great wealth transfer, you don't want your assets transferring to the IRS.

So there is never an age where you are too old for a Roth conversion to make sense.

Well, great. You know, again, Peter, I'm really glad that we had a chance to talk this through. Again, it all comes back to proactive planning, but now is the time to at least consider a Roth conversion. If somebody wants to talk through any of these reasons with you, what's the best way to get a hold of you? Give me a call at Rashawn Planning, 919-300-5886.

919-300-5886. You can also go online. It looks like richonplanning.com. It is rashaanplanning.com. It's not just your finance, folks.

It's your future.

So plan proactively. Give me a call or visit at rashanplanning.com. Great. Peter, thank you. Hey folks, Peter Rashan here with Rashawn Planning.

So glad that you are enjoying the podcast, Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are finding of value is at 919retired.com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred, 401k, or IRA, this is the website. This is the resource where you can go, you can plug in your own numbers, your information, you can slide the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to.

A lot of times it is a very significant savings.

So if you have not yet, go to the website 919retired.com, run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional advisor. Any investment and/or investment strategies mentioned involve risk, including the possible loss of principal.

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