Financial Updates With Erin Kennedy & Peter Richon | The Clock is Ticking on 2022 Conversions

We want you to plan for success. Welcome to Planning Matters Radio.

Peter, it's good to see you. The end of the year is creeping up and we want to remind everybody that the clock is ticking on those 2022 conversions. So if you're considering converting an IRA to a Roth IRA in 2022, we're going to break down everything that you need to know. So let's start with the deadlines, because it is a big misconception about conversions that they can be done up until the tax filing deadline.

But that's not right. Well, it's the confusion between conversions and contributions that extends into this question. A lot of people are are under the assumption that conversions, like new contributions of money to your retirement accounts, IRA specifically, can be done until you file your taxes. That is not the case if you are converting from an IRA traditional tax deferred retirement account to a Roth IRA. That has to be done within the calendar year that you plan the conversion to count towards. So you can't retroactively convert after January 1st and say, well, that one's for last year.

Nope. That's going to count in the calendar year that you make the conversion, which is an important consideration. Right.

And that is why we are doing the video today. So let's break down how this works. If I convert my IRA to a Roth, I'm going to be facing a tax bill this year, possibly a big one. Yeah, well, we try to control that tax bill. But yes, there will be a tax bill for that conversion.

It will be essentially counted as additional income on top of all of your other income. And when we are suggesting or executing Roth conversion strategies, we try to identify how much tax that's going to cost you. Now, you have to consider that your traditional IRA is a pay now or pay later tax arrangement with the IRS.

Right. So one way or another, taxes are going to be due and Roth conversions are a way to handle that eventual liability proactively. But you do need to understand the tax implications because you probably don't want to convert an entire account if it's going to push you up multiple tax brackets higher.

You want to. And we try to find the sweet spot, what we call maximize your tax bracket, which means whatever bracket your current income finds you in, whatever available space you have within that bracket, we try to use up, but not push you over into higher tax brackets. Now, there may be times and places where even in a higher tax bracket is still an eventual tax savings, but trying to minimize the overall bill, we maximize the current bracket and also important considerations.

Aaron, the impact that that might have on your Social Security income and or your Medicare premiums, because Irma is income related means assessment, your Medicare premiums are actually income means tested. And so if you convert over your IRA, that looks like additional income and therefore it could push your Medicare premiums higher. And we need to factor that into the considerations. But we're looking at now versus later. What's that bill going to be today?

What's that bill likely to be in the future? And there still may be times where even that is OK in the long run and advantageous to controlling your lifetime tax liability. OK, so I'm glad you brought up those considerations because there are several. But what are the specifics then that we should be considering if we're trying to determine if a Roth conversion is right for us? Well, you need to be looking at your income now and what your anticipated income later is likely to be. Also, what tax bracket and rate does your income now place you in and what that likely income later is going to place you in as far as your bracket and rate at that point in time. And for about a generation, Americans have saved under the pretense that we will be paying lower taxes in retirement.

And for the most part, that has held true and worked out. Tax rates have come down and brackets have gone up substantially since most of the baby boomer generation first started saving in their 401K. But I think we are reaching kind of a pivot point where taxes are more likely to be going up into the future than staying flat or going down.

And that's why we need to really be proactive where we can and control that tax liability. The chart you've got on the screen right now shows a 69 percent tax rate when Ronald Reagan became president. But I actually like the first point in post World War II era where there was a 94 percent tax rate. Guess when Ronald Reagan first started thinking about going into politics and the reason why?

He was making movies during that period of time and realized that if he made a third movie within a single year, he was actually taxed at 94 percent and only got to keep six percent less than six percent of his earnings because he was also in the state of California. And that is what motivated him to run for office. And you see that once he became president, those tax rates did come down substantially and have continued to come down. But with our national debt, with our day to day running expenses for everything that we have become accustomed to here in the U.S., I do think that we are at a pivot point. Yeah, there's a real scary chart right there. And if you flash back to the Great Recession, 2007, 2008, that national debt, by the way, was under 10 trillion dollars. So we've tripled that number just in the last 14 years or so.

Very scary. And that money's got to come from somewhere. So that national debt of about 31 trillion dollars after this downturn this year in the markets, it's a little less.

But it was estimated that there was about a similar amount of money in yet to be taxed tax deferred retirement accounts before the beginning of the year. So guess where there's a big target for raising some additional tax revenue? Yeah, right there in your yet to be taxed.

I owe you to the IRS of your IRA, your retirement account or your 401K. Right. When we talk about the U.S. debt, we know the government has to create that revenue somewhere and they either have to decrease spending, which we know they don't love doing, or raise taxes. So, yes, it's a very important consideration. I'm glad you brought that up. And Aaron, with interest rates rising this year, globally, it takes more revenue just to service the interest on the existing debt.

So that's another scary factor that we'll see how that plays out in years to come. But another reason why the government is going to need to figure out a way to raise more money, they do that only one way through taxation. So the last question that I have for you is a Roth ladder. I've heard about this.

What is it and who is it right for? Well, it's a period of substantially generally equal amounts of Roth conversion, right? So, again, maximizing that tax bracket, if we've got, let's just for round numbers, say a $200,000 IRA. Instead of converting all $200,000 all at once, maybe we would consider converting $40,000 per year over a period of five years. And by the way, as tax law stands right now, taxes are set to go up in 2026. So we've got about four years at the current rates before the 12% bracket becomes the 15, the 22 becomes the 25, the 24 becomes the 28. And so we crunch those numbers carefully, but we also don't want to bump us up into substantially higher tax brackets and rates, as I talked about. So we break it down over a period of years rather than doing it all at once. Important to note that each subsequent Roth conversion has the potential to start its own five year clock. And when you do a Roth conversion, you have to wait five years to pull the money back out of the Roth to realize the full benefit of the Roth account. So we do need to look at where and when we will actually need our money and create income. And this is one of the biggest factors that is often ignored in so many aspects of financial planning is optimizing your portfolio for your time, your time horizon and your time based needs. If you need that money sooner than five years, then maybe it's not a good idea to make a Roth conversion. We have to look at all of those considerations very carefully when making those recommendations and executing on really any financial moves.

When do you plan to use your money? Yeah, absolutely. Well, Peter, talking this through was very helpful. And again, we just want to gently remind everybody if they wanted to do it in 2022, they should probably call you sooner rather than later.

So what's the best way to get a hold of you? Yeah, jump on that, folks. Deadline is not December 31st. It is actually many financial institutions have given us deadlines early on in December. So time is really running short. If you would like to take a look at those Roth conversions or retirement income planning in general, there are some great options available right now on both the tax management and the risk management side. So give us a call.

Nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. Aaron, just another carrot here with interest rates increased this year. We are now looking at a lot more potential for a protect the principal and live off the interest approach than we could have looked at and and really achieved just a year or two ago. And cash flow rates are actually pretty attractive with that. Protect the principal, live off the interest approach.

And with Roth conversions may be attractive from a tax standpoint as well. So give us a call. Nine one nine three zero zero five eight eight six if you'd like to discuss. All right, Peter, thank you very much for your time. I appreciate it.

Always a pleasure. 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 adviser. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooks own capital management, a registered investment adviser, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.