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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 retirement questions. We're here to move past that oversimplified advice and dive into the nitty gritty. Now remember, this is just a show. It's not financial advice, so please do your due diligence. You got questions?
Mike:Text them to (913) 363-1234, and we can feature them on the show. David, what do we got today?
David:Hey, Mike. Is there ever a situation where someone with IRA funds should not do IRA to Roth conversions? There is. Okay. Yeah.
David:Let's hear about it. Because it seems like to me that Roth is like, we wanna be in Roth. Let's get everything to Roth. So this will be interesting to see.
Mike:Yeah. One of my biggest pet peeves in the financial services space is the idea that we're just gonna operate. We're gonna optimize and maximize within your current tax brackets. For what? Okay.
Mike:I mean, look at the 22% tax bracket and the 24% tax bracket and the room you've got in there. Great. It's like putting the blinders on and saying, we're just gonna go to this bit, and let's ignore everything else. What if in the 24% tax bracket or whatever they that you're interrupting Irma? What what if you need it?
Mike:What if you don't need it? What income do you have? How much do you have from a ratio standpoint of in pretax versus after tax? What are your legacy goals? In your legacy goals, are your kids high income earners?
Mike:Are they not high income earners? What's your tax bracket? What's their tax bracket? There's so many other questions than, hey. Here's your income.
Mike:Great. Now let's just do a little bit within your current tax bracket just to to maximize your growth. Oh, sure. Because at the end of the day, what you're looking at is your effective tax rate. And just because you might be in the 24% tax bracket or the 22% bracket for that matter, your effective tax rate is lower when you're at the beginning of a bracket than when you're at the end of a bracket.
Mike:And I know people get upset when I say this. I don't care. Because when you look at the ripple effect of the effective tax rate, whether it increases by one or 2% or not, this is very nuanced, it is easier to grow more money when there's more money in your account. It is harder to grow your money when you're pushing funds out of your account to pay these taxes. It's easier to grow more or your money when there's more money.
Mike:That's it. That's the bit. So if you're maxing out your 24% tax bracket, you have to ask yourself, okay. Well, do you really need to do that? Will RMDs be a problem in your future?
Mike:What if they're not? What if you're maxing out the 22% tax bracket, and you're starting to go into the 24% tax bracket? Let's just say what if. K? So your effective tax rate is still relatively low.
Mike:It's close to the 22% tax bracket for that that matter. And what if the income that you want for the rest of your life, accounting for inflation Mhmm. Accounting for potential medical costs, and so on, is is above your future RMD projections? What if your RMDs is only, like, 70% of the income you already want? Why would you be aggressive in your IRA to Roth conversions?
Mike:Well, the argument is, well, taxes are expected to go up. But what if they're not? And if they are gonna go up, when? And if at that point, gotta ask yourself then, how much more money could you have grown by keeping your dollars in there and then addressing effective tax rate at that point. No one knows the future, but making decisions based on fear is a great way to throw money away.
David:And so what you're saying is if we just kept the pretax money in the IRA instead of, like, paying our taxes and moving it over to the Roth. Now the Roth has a smaller balance because we sent a lot of the money to the IRS. Right? And so that money can't grow as much as the Yeah.
Mike:Let me just look up here current tax brackets because I don't have these memorized. Current tax brackets, income, 2025. So now we've also time stamped this because they change every year. Alright. So here we go.
Mike:So let's just say your total income. K? Married funny jointly. Yeah. K?
Mike:You're looking at a 150,000. Alright. K? So you're halfway through the 22% tax bracket. Okay?
David:At $1.50?
Mike:At $1.50. Okay. So it it tops out at 206,700.
David:Okay. Okay.
Mike:So then ask yourself real quick, should you do another 50,000 IRA to Roth conversion? Maybe you should. Maybe you shouldn't. Oh. You wanna run both situations in your plan to see the difference between your percentage of IRA to Roth towards the end of plan, let's say 90 years old, 95 years old or so.
Mike:How much would go then go to the kids? Does it drain your IRA assets too quickly? How does it work within your RMD later on? And what if, just for kicks and giggles here. Yeah.
Mike:What if instead of going to 200,000, you stuck to the 150 thousands? Here are some things to consider. 150,000, let's say you have the 30,000 deduction. So your 150,000 is really like a 120,000. Uh-huh.
Mike:Okay? And then with that, maybe you you scoot in a little bit more of the IRA to Roth conversions, but now you're back at a 150,000. Okay. Okay? Assuming you don't have a bunch of tax free interest or municipal bonds or too much in a cash account for taxable interest and so on, that your modified adjusted gross income, everything stays below a 150,000.
Mike:You've utilized your deductions. You've stayed below a certain threshold. You're now enjoying Trump's new senior deduction. You're enjoying your retirement deduction. You're also enjoying mostly in the 22% tax bracket, and you're keeping more money in your accounts because you're paying less than taxes.
Mike:That means there's more money in your account. You're more tax efficient taking it out, which means there's more money to grow for legacy purposes.
David:Mhmm.
Mike:What's the balance? You run the hypothetical situations of if we did max out the bracket. If we didn't max out the bracket, and what does that look like? And if taxes were to go up, let's say, in five, ten years, what would that look like? Mhmm.
Mike:Too many people have their eye focused on, I wanna pay the least amount of money in taxes. That's a horrible way to basically hurt yourself, to shoot yourself in the foot.
David:Is it maybe too narrow of a focus, like sort of just to spite the IRS or something like, I'll get you and you wag your finger at
Mike:them or something? Yeah. I mean, if you wanna pay the IRS the least amount of money, just convert everything over this year. Dollar for dollar, you'll spend the least amount of money in taxes over your lifetime. Uh-huh.
Mike:Dollar for dollar, if you wanna give the most money to the IRS, slowly do IRA to Roth conversions and slowly maintain the most money possible. But guess what? The same situation that paid the most of the IRS was the same situation that got you the most money for legacy and for income for yourself. It's almost like you're kind of tied at the hip where you both win. What Michael Scott from the office say, win, win, win, and I win because you win in the IRS?
Mike:I'm not trying to get the government more money, but it's interesting because many of the IRA to Roth conversion sales pitches, the IUL sales pitches, focus on the least amount of taxes you paid. They're forgetting the dollars that you kept many times in these conversations. Yeah. Tax planning is very complicated because every person's going to be different, And I would say maybe 30 to 40% of the time when I see someone in the office here, and we're doing these calculations, it does not make sense to do any IRA to Roth conversions.
David:Because
Mike:if you just focus on the max income that they want at a certain effective tax rate throughout their life, their RMDs are satisfied, and they're able to slowly but deliberately drain their pretax dollars so that by their mid eighties and nineties, most of their money's already in Roth anyway. It's almost like we're supposed to find balance in all things, but how cool is that? We wanna be aggressive. We wanna be extreme. We wanna be like, rah rah.
Mike:You know? Yeah. But, no, there there is peace and prosperity in balance. Did we answer the question?
David:I think so.
Mike:Yeah. Sometimes I go down a rabbit hole when it comes to taxes.
David:So to put a cap on it then here, when should someone not do IRA Roth conversions?
Mike:When it doesn't disrupt their long term lifestyle and legacy goals, when it doesn't disrupt or have to disrupt their Medicare surcharges or IRMA Mhmm. When their R and D is basically a part of the income they already want Okay. When their legacy goals and their kids, whoever the beneficiaries are if your beneficiary is a charity, then forget about it. Like, who cares at that point? So you have to look at the full perspective on the projections to make that assessment.
Mike:Yeah. This isn't a here's your IRA assets, here's your long term, and great. Let's pay the least amount of taxes. That's an oversimplification. Be very cautious of the oversimplified sales pitch because there's a lot that goes on in these conversations, and everyone's different.
Mike:It's all based on your lifestyle and legacy goals and how to get the most out of your money. And sometimes, this might sound unpopular. It might sound counterintuitive, but sometimes the way you're gonna get the most out of your money is also when you're gonna pay the most, and you gotta be okay with that. Because at the end of the day, what's the goal? It's for you to stay rich.
Mike:That's it. 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. 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.
Mike: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.