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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to RetireOnTime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time. I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can cover it all.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed cohost and colleague, mister David Franson. Thanks for being here.
David:Yep. Glad to be here.
Mike:David's gonna read your questions, and I will do my best to answer them. You can always submit your questions anytime during the week by texting (913) 363-1234. Again, that number is (913) 363-1234. Let's begin.
David:Hey, Mike. Is it better to do IRA to Roth conversions at the beginning of the year or the end of the year?
Mike:I would argue it's better at the beginning of the year than the end of the year. And the reason is your balances are lower typically. I mean, most of the time, the markets are up at the end of the year.
David:Your retirement account balances are lower, you're saying?
Mike:So, yeah, at the beginning of the year, you hope that in the year that your assets grow. So if you know how much income you're gonna take, if you know kind of what your everything is expected, then I would recommend doing the beginning of the year, not the end of the year. And when markets crash, that could be a good time to do it. Now keep in mind, you don't want to accentuate losses by doing IRA to Roth conversions, and then pulling the taxes out of that conversion.
David:Okay.
Mike:So if you have, let's say, $50,000, it was 70,000, but you lost $20,000, you could move that $50,000 over dollar for dollar of an IRA to Roth conversion, and you just pay out of your emergency fund or a principal protected account, the taxes. Okay. Now you've done a more effective conversion at the beginning of the year, and then that 50,000 you hope enjoys the recovery at the end of the year, which then gives you more money in Roth. You paid less overall in taxes. So I'm a fan of the beginning of the year, but you've got to know what your taxable situation is going to be.
Mike:You don't wanna cross a tax threshold. So for people who are working, if you kind of know roughly what it could be, maybe you do some at the beginning and some at the end of the year. This is where tax planning comes into play. Most people do at the end of the year because it's like a fun year end checklist item. But dollar for dollar, I think it's more effective to do at the beginning of the year Mhmm.
Mike:Because you expect your balances to be greater at the end.
David:And is there a certain age that people should start thinking about doing IRA to Roth conversions, or is that just depends on the person and their situation? Or
Mike:I mean, Layton's twenty seven years old. I'm telling him to do IRA to Roth conversions now. Okay. Alright. Now he can't pay out of his IRA the taxes, so in his situation, he's gonna actually take the IRA funds, convert them over, and then pay taxes out of his non qualified account or his checking or savings account to avoid that penalty.
Mike:Oh my gosh. Yeah. If he is doing those conversions now, think of the compounding benefit later on in life. Uh-huh. So the earlier you can afford it, the better.
David:Okay.
Mike:In my opinion.
David:Yeah. And then any reason to do them in retirement? Like, I've I've already been retired for five years. Why should I do these conversions,
Mike:or should I? Yeah. That's a great question. Oh, thank you.
David:That happens occasionally. Yeah. The real zinger.
Mike:It's tough to answer because if, let's say, you're 60 years old, now you're 65 years old, you wanna be careful of Medicare surcharges or IRMA. Right. You wanna line up your income when you're 73 years old, so it does your RMD, which would be, you know, your pretax dollars, your IRA assets. Can you weave that into your standard deduction? Is it too high?
Mike:Is it too low?
David:Lots of considerations, it sounds like.
Mike:There's a lot of considerations when it comes to should you do it, and then your legacy intentions as well. As an overarching principle or rule of thumb, it's generally good to do some. How much is the question, and you don't want to do it just because everyone's doing it.
David:Oh, right.
Mike:That's the last thing you want to do.
David:Because it sounds a little bit exciting like, oh, yes, I can convert this, and then I won't have to pay taxes when I take it as income later, right? Yeah. Because it's in Roth. And so for the sake of not paying income tax, that's probably not the best.
Mike:Yeah. Well, let's do a more of an exaggeratory example. So let's say you're taking 20,000 to 30,000 from your portfolio each year.
David:Okay. Okay.
Mike:That's the income that you want. Your assets are greater than that, but that's just all you need when you include for Social Security as well. Okay. Your RMD is gonna be 30,000. Standard deduction's about 30,000.
Mike:So would you rather today convert 30,000 from IRA to Roth and pay, let's say, an effective tax rate of 18%, or would you rather just spend the money later on tax free because you've got the standard deduction? I don't know. Pay no taxes, or pay taxes. Yeah. You have to have income in retirement.
Mike:So it's a complicated question. Yeah. It's a good question. It's a healthy question, but the way I answered it is the holistic answer. The typical answer people will get is, oh yeah, absolutely.
Mike:Yeah. And put it in the tax free, let's and then I'll charge you 1% of your assets to grow your assets tax free, and it'll be just great. Everyone's gonna love it. Whatever. Yeah.
Mike:It depends on your situation. Alright. As a general rule, it's a good idea, but look into the details and where you're going, because that's like, you know, the Wayne Gretzky quote. Oh, right. Don't skate where the puck is.
Mike:Skate where the puck is going. Yeah. You wanna do your tax planning based on your income and lifestyle and legacy needs in the future. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.
Mike:Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.