Shawn Terrell (00:03.03)
Welcome to Dentist's Puns and Money. I am your host, Shawn Terrell. There's an old saying that the cobbler's kids aren't wearing any shoes. And what that effectively means is that sometimes people who are good at their jobs and expert in one area aren't always the best at being the same level of expert as it relates to their own personal situation. I think this can be true of financial advisors.
But I did receive some really good advice in my younger days as a financial advisor at a conference. And another advisor was speaking and he recommended that I always be my best client as a financial advisor. So I've always tried to kind of follow that. Like I got disability insurance even very young in my career and that served me very well.
Even before I was married or had kids, got my wills and trusts done, even though I had to redo all that stuff later on when I did have a wife and kids. But I think that advice has always served me well. Interestingly, I almost sort of missed something in my own financial situation a few months back, and I wanted to share that on the podcast today. So if you follow along for the last few years, you've heard me talk about how this
current point in time, these few years here, are a really good time to do some analysis on potentially doing a Roth IRA conversion of pre-tax money to post-tax money, i.e. money in a Traditional IRA that's tax-deferred or money in a qualified plan that's tax-deferred and moving it over to a Roth IRA, paying the taxes now.
and then not having to pay taxes ever again on that money or the growth of that money. And the reason is that this may be hard to believe, but taxes right now are historically low from where they've been in the past and probably where they're going in the future, especially with the Tax Cuts and Jobs Act that as I record this is set to expire at the end of 2025. So how I almost missed this is, you know, I was looking at my own financial situation probably back in
Shawn Terrell (02:20.811)
of 2024. And as I thought about it, I'm like, you know, I'm myself probably a pretty good candidate to do a Roth IRA conversion with some tax deferred money that I have and moving it over to a Roth IRA that I have because as a result of the health issues I suffered back in 2023, my income is down quite a bit from where it had been prior to that. And as a result, as I analyzed my own
tax returns from 2023 and 2024, I had some room in the tax bracket that I was in to fill up a little bit more room before moving up to higher tax brackets, especially with the expected sunset of the Tax Cuts and Jobs Act at the end of 2025. So, my analysis on my own situation taught me that, yes, I should do a Roth conversion and
Then the next question became, what's the ideal timing to do the Roth conversion? Because there was only a couple of months left in the year. So in my head, I thought, well, let's just kind of see when the market unexpectedly takes a dip in the next couple of months, and that will be the ideal time to do this conversion. The problem was, well, it was a good problem, but the market sort of in November and most of December for 2024 was kind of
creeping up or pretty steady on a slight upward trajectory. So there wasn't any huge inflection point where it was just completely obvious that that's when I should do the conversion. And the tricky part too is that to transfer money from my Roth, or excuse me, from my Traditional IRA to my Roth IRA and have that done by the end of the calendar year, my custodian that I use for my accounts, Altruist,
and I can do that electronically, but the deadline to do that by the end of the year was actually Friday, December 20th. And I was planning to be traveling on that day. So I thought, well, I don't want to wait till the last minute. I'll try to do it maybe a week before that. So the market was humming along and there wasn't any obvious point to do that. So I think it was on Friday, December 13th, I started the process of converting my some money.
Shawn Terrell (04:45.019)
in my Traditional IRA to my Roth IRA. at the San Fistodio. And a couple days after that, the following week, the Federal Reserve announced that it was changing the way it was going to handle interest rates the following year, and that was sort of unexpected news. And as a result, my account, my Traditional IRA dropped like 3 or 4 % within a couple days. And here I thought that I just...
started this Roth conversion prior to this news coming out and that I completely messed it up or missed my window to do that in an ideal way. But turns out due to dumb luck, I actually turned out a little bit better than I probably would have been because I had to liquidate some cash in my Traditional IRA account in order to transfer it into the Roth IRA. And that process of liquidating, transferring and reinvesting in the Roth IRA
actually occurred during that window of the Federal Reserve changing its projections for 2025, i.e. the market sort of drop. And as a result, I sold a little bit high and bought a little bit lower. Completely by dumb luck, would not recommend timing or trying to time that out in the future because as you've listened or if you've listened for the last couple of years, I am not someone who believes that
anyone can accurately predict what the market's going to do in the short term. So I'm not big in trying to time the market per se. So that's a little bit about kind of like how I arrived at that decision and how I did it and sort of the dumb luck that helped me along the way. I I would share that in case anyone else is considering some Roth IRA conversions for 2025, which I think...
might be, if you're going to do them ever, might be a really good time to do them in the next 11, 12 months. One tip, if you're considering it, is don't wait till the end of the year to do the full conversion. In fact, don't even do whatever you want to convert for the entire year. Don't do that all in one chunk if you can help it. I would break it up into two or three different pieces. So...
Shawn Terrell (07:07.682)
Let me back up a second. I do want to sort of let you know or explain my rationale behind why I wanted to wait for the market to go down a little bit. So let's just say that I was going to convert, and this is a complete example. I'm using round numbers, $100,000 from my pre-tax account into my Roth IRA account and pay the taxes on that now. And that the effective marginal tax rate, technical term, that I was going to pay on that $100,000 conversion,
would be 20 % or $20,000. My thinking was if I could try to do that $100,000 during a time that the market was down a little bit, then let's say it was $95,000 and I converted it then, then that 20 % tax rate is a flat dollar amount of $19,000 instead of the $20,000 that I would pay when it was a little bit higher. So that was my thinking. That was my rationale. And as you've heard me talk about taxes in the past,
I don't think there's these huge tax moves that people can make all at once to save a little bit in taxes over the long term. It's these small little micro engagements that add up over a long period of time that sort of help you not evade taxes, but pay the least amount legally possible. So being a little bit more strategic about things. So that was the rationale. Back to my tip and why not to...
do the whole $100,000 all at once. First piece of that is you might have unexpected income throughout the year. if you, so it's good to break it up into two parts. Back to my example about why not waiting till the end of the year. to complete the taxes. Here's how I would do that $100,000 if I had to do it over again. And granted at the beginning of 2024,
I keep bumping my mic. At the beginning of 2024, I did not know that my income was going to be down still at the end of 2024. Part of my recovery has kind of been coming to terms with not knowing what I'm going to feel like at some point in the future. Anyway, so it made sense at the end of the year. But if I knew at the beginning of 2024 that my income was still going to be down at the end of the year, I probably would have broke that $100,000 conversion up into three parts.
Shawn Terrell (09:34.4)
I would have done $50,000 of it or half of what I wanted to convert in late April, early May, after I had done my taxes for 2023, because your taxes are a real key component of the analysis of whether or not a conversion makes sense. So I would need my taxes completed to sort of do that analysis for how I was going to think about 2024.
what my taxes were in 2023 and sort of a projection of if they were going to be the same or a little bit different in 2024. So I do half of that in April, May, after I get my taxes for the previous year completed. If you extend it all the way out to October, that makes things a little bit trickier. And then so I would have had $50,000 left to convert at some point in 2024 in this example. And I probably would have done
25,000 more of a conversion in August of 2024 when if you follow these things closely the market sort of took this unexpected dip that no one as I recall really could predict why it happened but it was down a little bit at the beginning of August in 2024 and so that would have been me saying hey this is sort of an unexpected opportunity but let me try to pay taxes on a little bit less money of this conversion and
do 25,000 then, and then I would have still done the remainder 25,000. So 50, 25, 25 for a total of $100,000 for all of 2024 broken up into three parts. I still would have done 25,000 along the same timeline that I actually ended up doing the full conversion this year. So late November, early December, depending on where Thanksgiving and Christmas hit for the year.
And be cognizant of your custodian as well. They, as I mentioned in my situation, often have deadlines for completing these conversions a week or two ahead of the actual end of the year. Don't wait to the very last minute if you can help it. One warning that goes with the tip, do not do the full conversion at the beginning of the year. In fact, I wouldn't do any Roth IRA conversions at the beginning of the year because you cannot undo a Roth IRA conversion as it stands.
Shawn Terrell (11:53.872)
right now. Now that could change depending on what happens with the Tax Cuts and Jobs Act in the years to follow, but as of right now you cannot undo it. And if you receive any unexpected income throughout the year, like the next 11, 12 months, then that could sort of mess it up and take your good idea and make it a bad idea. So unexpected income could be from like an inheritance, you inherit some money, or
something comes along, a health event or a good investment opportunity in real estate and you need some money and you want to take money out of your tax deferred account, but doing so will bump up your taxes for that year and bump you up into different tax brackets perhaps too. So don't do it at the beginning of the year because you can't undo it and you could unknowingly or inadvertently pay more in taxes than you actually have to.
So the final tally for how I did this and how it turned out will be, I'll have a better idea on that when I actually do my taxes for 2024 and probably March, a couple months from now, March of 2025. So maybe April, I will report back on this podcast how it turned out, or at least I will try to do that, try to remember. Speaking of taxes and tax time, now that we have officially flipped the calendar to 2025,
There's a whole new list of rules and numbers that come along with tax planning in 2025, like what the tax brackets are, what the standard deductions are, the maximum amounts that you can contribute to your qualified plans or your 401ks. If you're taking RMDs for the first time, the RMD table is in this piece of information that I'm referencing. That's all new for 2025. You can get this information in a PDF download on...
my link site. If you're listening to this podcast on a podcast app, then go to the show notes and scroll down and click "Resources from Episodes" and then click on "2025 Important Numbers." You give your email address and then that will send you a link to download this list of important numbers for 2025. If you happen to be watching this on YouTube now that we're doing video here, go to the Dentist Exit
Shawn Terrell (14:15.546)
Planning, YouTube page, the main page, and on there, there should be a link or a Linktree link that also will take you to this "2025 Important Numbers" download place. So go there, put in your email, and then it will email you or should on automated basis email you this list of 2025 important numbers. I hope that helps as you start planning for 2025 and thinking about little micro ways that you can...
saving taxes. So that's it for today. I'm Shawn Terrell. Thanks for watching. Thanks for listening. And we will talk to you again very soon.