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How Old is Too Old for a Roth Conversion?

Planning Matters Radio / Peter Richon
The Truth Network Radio
May 25, 2024 9:00 am

How Old is Too Old for a Roth Conversion?

Planning Matters Radio / Peter Richon

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May 25, 2024 9:00 am

Taxes are set to increase in 2026. And even though it may not feel like it, we are living in a historically low tax rate. In this video, Peter with Richon Planning and Erin Kennedy talk through the pros and cons of a Roth Conversion for someone in their 70's.

 First, the pros: if you convert your IRA to a Roth IRA, you and your beneficiaries will have tax-free withdrawals, all future growth will happen tax-free, and you'll have no Required Minimum Distributions, which means you have better control your tax liability.

 But before you convert, you should also consider the cons: when you convert, you will pay all those taxes upfront, which could mean a big tax bill in April. And even though we are living in a historically low tax rate, there is uncertainty over future tax rates: they could go higher, they could go lower.

 If you are in your 70's and considering a Roth Conversion, please give Peter a call to see if it makes sense as part of your financial plan. Give him a call at (919) 300-5886 or visit

#WealthManagement #RothConversion #IRA #Retirement #GenerationalWealth #Taxes


Peter, very good to see you.

Welcome back, everyone. Today we are going to discuss how old is too old for a Roth conversion. So taxes, as we know, are set to increase in 2026, and even though it may not feel like it, we are living in a historically low tax rate right now. So Peter, let's talk through the pros and cons of a Roth conversion for someone in their 70s.

First, the pros. Of course, if you convert your IRA to a Roth IRA, you and your beneficiaries will have tax-free withdrawals. Yeah, and it does not feel like it, by the way, that we are in a historically low tax environment. But in reality, tax rates, at least income tax rates, would need to increase 25, 30 percent, even to get back to historical averages, which, by the way, already kind of law on the books as things stand. They will be going up, so why not have this conversation while taxes are on sale? I think never too young, never too old, but it depends on your goals and your timeline and what you really need those dollars to do, because when you make this conversion, you're going to pay some tax. And that's to move the money from the left pocket to the right pocket, so to speak.

The IRA, the traditional tax-deferred account, has never been taxed, which has been an advantage as tax rates have been higher and come down over the last 35, 40 years. However, with the shift in paradigm and where taxes may go into the future, maybe now is the moment to make that shift and change the pockets. On the way over, the IRS is going to want to collect their pound of flesh, and so there will be a tax bill for that. And so we really just need to determine what your goal is, what the timeline for those dollars is, and when you may need them, because you do have a five-year seating period for conversions that you are required to let those dollars sit in the account. And honestly, you wouldn't want to do the conversion unless you were going to let the dollars sit, because the advantage is in the growth over time. So it's kind of just a reconfirmation that when you make a conversion, you want to let the dollars sit for at least five years to allow them to grow. That's where the benefit is, but you would experience a penalty if you needed or chose to withdraw the dollars before that five-year period. I heard one person explain, essentially, the litmus test is someone's going to pay the taxes on this.

Do you want it to be you or your kids? Yeah, if it's generational money, if this is legacy money, then that is essentially the question. And I hear people say, well, if I leave them money, then they can pay the taxes on it.

I get it. Not a selfish notion at all, because we don't like paying taxes, but at the same time, if you leave money behind, do you want the IRS to be your largest beneficiary or a larger beneficiary than they would otherwise need to be? And if you leave a significant amount of yet-to-be-taxed, tax-deferred dollars, traditional IRA or 401k dollars, to a handful of children, maybe as little as two children, or like 50-50 split of the beneficiary, if they receive that money, the IRS probably takes 35 to 40 percent off of the top, and then the two children, the intended beneficiaries who we would want to get the money, are left to split the remaining amount, and the IRS has just become the largest recipient of your hard-earned dollars. So I get it that maybe we leave the tax bill to the children, but if your goal is growth on your money and the account is tax-deferred, the IRS is right there hand-in-hand with you sharing that same goal because they know they get to harvest a larger tax bill down the road. That's kind of been the realization of this generation as they've gotten to retirement, and they're like, wow, I owe a lot of taxes now.

Yes, you do. That lump sum that has grown, the tax bill has grown right along with it. It's not that we made a mistake by doing so, it's just that if we got to ask ourselves, the paradigm is going to change, if the tax environment and rates might change into the future, and most people think they're going up, is now the time to manage that tax bill, whether for our own lives and income purposes down the road, maybe to manage RMDs, or if it's a legacy kind of play. There are a lot of considerations there.

So many moving parts, yes, but absolutely. The possibility that you may push your kids into a higher tax bracket of course needs to be part of that equation. I want to talk through something though, the next pro which you touched on, no required minimum distributions, which again gives you more control over your tax liability. Yeah, and right now, you know, the age where the IRS requires that you start taking money out of your retirement accounts if they have not yet been taxed is 73. That is slated to go up to 75 over the course of the next several years, but when you reach that age, if you have deferred and delayed paying the tax bill, then the IRS requires you to begin to remove dollars so that they can collect the tax revenue. And if you convert to Roth, then you go ahead and pay that tax bill proactively by choice, rather than defaulting and and deferring to the IRS's plan for how to collect it, you get to then proactively decide how to go ahead and pay them off.

And therefore, once those dollars along with you reach your age 73, the IRS has already collected all of their tax revenue from that pile of cash now inside of the Roth rather than the traditional IRA, and therefore they have really no desire to force you to distribute it during your lifetime because you've already paid them off. Now, that being said, the government would love to get those dollars back into taxable circulation where they can be taxed again. Maybe they're reinvested and there's capital gains taxes.

Certainly, you know, if there's transactions, if you purchase something, there's sales tax. So income tax is only one level. They do want those dollars back in taxable circulation, which is why whether it is traditional IRA, tax deferred, or even Roth IRA, when dollars go to the next generation, they are required to be liquidated. Those retirement accounts are for your retirement. They are not for generational wealth transfer. And the SECURE Act really, really reconfirmed that because when they passed the SECURE Act, they put into law that beneficiaries of the next generation must liquidate accounts, retirement accounts 100% within 10 years of receiving those dollars.

So there is an RMD. It's just not in your lifetime. It's for your children if they inherit those accounts. And now let's tick through some of the cons. First, when you convert, you will be paying those taxes up front, which could mean a very big tax bill come April. It could.

And kind of a double and triple whammy there. That conversion could potentially also impact your Social Security taxation. It could also potentially impact your Medicare premiums, IRMA, income-related means assessment.

So we've got to be careful of those two things. Now, the limits for those, we could probably work within some thresholds and do in most cases where we're suggesting proactive Roth conversions. But there is going to be a tax bill due on the dollars themselves. And it becomes a question of, hey, do I want the IRS to just withhold some taxes from the dollars that I convert or do I already have some after tax cash on hand that I could choose to pay that tax with? There is kind of an optimal, better way to do that because after the conversion, cash that grows is going to be taxed again. And then money that is in the Roth when it grows is not taxed again.

So ideally, the goal would be to get as much in the Roth as possible and usually pay the tax with after tax cash on hand, like bank account kind of money, not with the IRA dollars themselves. But either way, if the goal is to get the money out of the scope of the IRS and go ahead and manage and prepay the taxes, really either one could be beneficial. It's just that one may be more beneficial than the other if we've got the ability to manage the tax payment that way.

Mm hmm. So the next con would be uncertainty over future tax rates. I know we all think taxes are going to go higher, but Peter, they could go lower. Monkeys could fly. Yes.

I've heard my dad says that. I mean, you know, there there's a whole possibility of what ifs out there in this spectrum of the universe and what if taxes go lower into the future? I get that. And that would be fantastic if it happens. What's the realistic expectation of that when we are currently spending every dollar that we bring in in tax revenue on non discretionary line items in the budget before Congress even sits down and whispers about spending any money? Every dollar of tax revenue is basically already spent and accounted for. And Congress, by the way, once they sit down, likes to spend even more money. We've got an almost thirty five trillion dollar national debt and we're running deficits each and every year. The last time there was a balanced budget was in the early 2000s.

I think 2001. So like, what's the reality of being expecting that taxes will go lower into the future? Yes, I guess anything is possible, but it's it's not really likely. And even if that does happen, when your account value grows, so does the tax bill. So still, it is maybe a matter of crunching the numbers. But how much lower would taxes have to go for you to truly pay less in total tax over your lifetime if you are assuming that once you move those dollars over, there is going to be some growth on the account.

And then that gets into several moving parts. But just ask yourself, do we think taxes are going to go lower into the future? And by the way, remind ourselves that law already on the books, if nothing is done, is that taxes will go up in just a few short years. January 1st, 2026, the 12 percent bracket becomes the 15 percent bracket. By the way, that is not a three percent tax increase. That is a 25 percent higher tax bill on those dollars. And then the 22 percent bracket becomes 25.

The 24 becomes 28. So taxes are already slated to go up. And could they go up even further? Absolutely.

Yes, they could. And I was a little slow on the punch here, Peter, but I did pull up the U.S. debt clock for you, right? Yeah. Yeah. It's scary to look at. Thirty five trillion dollars here. Let's just continue to ignore that, like Congress does. Oh boy.

It gives me heart palpitations. So let's just cut to brass tax here then. If I am 70 and can pay that tax bill in cash, is the answer a yes? And then at what age does the answer become a no?

I don't think there's an age where the answer becomes a hard no. The question for the 70 year old is, are these specific dollars, dollars that you may need for your purposes in the next five years? And if the answer is yes to I am going to need these dollars in the next five years, then the answer to the Roth conversion probably should be a no. But remind ourselves for those 70 year olds considering this that in three years you're going to be required to start pulling money out of those accounts anyway. Does it really make sense to defer and default to the IRS's plan? Or is maybe that not the plan that's in our best interest and we should be more proactive in implementing our own plans for how to pay the taxes that are eventually due?

It is a compulsory purchase. It's pay me now or pay me later. So it's just a decision of when is best for us to pay. All right, clearly a lot of number crunching and a conversation with the professional needs to be had if you're considering a Roth conversion.

Peter, what's the best way to get a hold of you? Give us a call at Rashaan Planning. We do offer to put together the optimized retirement plan.

It's a no cost, no obligation. It is a written plan detailing income, investments, taxes, healthcare, and legacy. Five essential items that should be addressed in everyone's written plan for retirement. And certainly income, investments, and taxes all are part of this consideration as well as legacy and maybe potentially even healthcare. All tied up with the decision of how and when you want to pay your taxes.

So again, have that conversation with you. There's also an online calculator we've put out there,, You can go there and you can put in your own numbers, your balance, your age, your ballpark tax rate, and you can see side by side what is the bill if you do default to the IRS's plan and what is the bill if you do choose to be proactive.

And that's pretty eye opening for folks. So give us a call, 919-300-5886. You can go to the website for that calculator, the retirement tax bill calculator is at, You can also visit our company website, or email me peter at and it looks like rich on but it is my last name. So lots of ways to get in touch but this is definitely one that you want to talk with your professional team about and try to keep as much of your money. It's not what you have there, it's what you get to spend out of it, what you get to leave behind.

Those are the things that matter and the taxes are the biggest expense standing in between. Yeah. All right, Peter, thank you. Thank you, Erin.

Hey everyone, Peter Rishan here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful and as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel and in future videos. If you got a topic that you've been thinking about or is of concern for you financially, be sure to let us know. We'd love to help you by discussing it on the channel. So appreciate the continued views and the likes and the subscribes, the shares, the comments, always helpful. We look forward to getting you the information that you need.

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 take investment, tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor 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.
Whisper: medium.en / 2024-05-25 10:09:22 / 2024-05-25 10:15:44 / 6

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