I'm 60 with $2M. Should I Prioritize Roth Conversions or Healthcare Subsidies?

So I realize not every single episode is going to apply to your situation , but I do my best to keep it general . So if you do want to listen to every episode , you go . Yep , I took something away that was valuable , but I also want to really dial it in because a lot of you have saved and invested well .

You might have between two and five million of pre-tax assets so 401k or IRA and you have a big tax planning decision to make . And here's the decision Should you do Roth conversions or should you intentionally try to keep your income low to qualify for a health insurance subsidy ?

The right choice is going to save you hundreds of thousands of dollars and today I'm going to show you , through my framework , how you can think through this decision . So if you don't have two to five million bucks , it doesn't mean you have to tune out , because , of course , I mentioned a lot of you .

You're on your way there and you are going to be there and it is going to be a decision you have to make . But if you are in your late 30s , going , is this the episode that's going to apply to me ? Maybe not , and I don't want to waste your time .

So , of course , listen to this if it's helpful , but if you are call it in age 50 and above and you do say , yep , ari , I'm going to be in that space , or right now I have between two to five million in pre-tax assets . I want to make sure I'm doing the right things if and when I choose to retire early . So we are going to work through that .

But , as always , want to go through a recent review . This one was via email , a very kind review from someone who , they say Ari I'm 73 years old couldn't figure out how to leave a review on the podcast and I'm a Spotify listener . So to this listener don't worry , on Spotify you can't leave a review , but on Apple Podcasts you can .

So I'm glad that you sent an email . Ari loved the podcast , really helpful , and it makes me think differently and feel young again . Well , I would say you're still young , because you're an investor and you might need this income to last 20 , 30 plus years , but I appreciate the sentiment and see where you're coming from .

You see , ari , I've never thought about tax planning in the way that you mentioned , where it's not about saving the most in a single year , but over the course of your lifetime . That is correct and , in fact , I'm going to discuss that today .

All of this and more is on my YouTube channel , and if you're looking for a custom strategy to retire early , it's what I love to do Now . I'm personally not going to be doing this forever .

Within the next six to 12 months somewhere in that range , depending on a few factors I am personally going to limit the amount of people that I work with , because I always want to meet with the current clients that I love meeting with , and I could have 500 clients , but all my current clients would not get the service they deserve , and I want to help as

many people as possible . My goal is to help a million people retire early with confidence , and so right now I think a lot of you know this as I've mentioned it on episodes , but I work with about 70 clients and I'm going to stop at around a hundred , and currently I'm training more advisors to focus on the nuance of an early retirement .

So , with that being said , reach out to myself or a member of my team If this is of interest . Let's hop into today's episode right away , which is , once again , roth conversions , health insurance sub subsidies . Excuse me , I couldn't even . I'm too excited for today's episode , I couldn't even say subsidies .

We are going to talk all about this today and it really boils down to if you've got , like I said , seven figures plus in your portfolio , you're going to run to this challenge . You might be going , ari , I'm working hard today . I don't even know what on earth you're talking about and I'm going to introduce this challenge to you .

And why does this challenge exist ? Well , here's why Medicare does not start until 65 . So if you want to retire at 60 or 55 , like a lot of you that reach out to me , you're wondering okay , ari , I know that . So I need health insurance from somewhere , but I also don't want to spend more than I need to , and so you go .

What if I could keep my income low to qualify for a subsidy ? And if your household income is less than 400% of the federal poverty level , then you qualify for a health insurance subsidy . So you're wondering okay , is that a good option ?

Or should I try to keep my income at a certain bucket or certain amount or under a certain bracket so I can do Roth conversion ? So why on earth would we even think through this ? And here's why you have a tax planning window and what this window means . It's not a literal window , of course , in your house , but let's assume you want to retire at 60 .

Well , social Security is going to get turned on . Now you can choose when you turn it on . Maybe it is 67 . Maybe it's 70 . Maybe it's 62 . But once that gets turned on , it means there's less room where you can do what we call effective Roth conversions . Then guess what happens ? Rmds turn on . Maybe that's age 73 . Maybe it's 74 . Maybe it's 75 for you .

But if that's you , once that happens , once you're at that age , it's really not effective to do a lot of these conversions , unless there's a really , really interesting situation . There's only one or two where I've ever seen me still doing conversions for clients who have a really healthy portfolio balance and they're taking RMDs .

But for most of you it's okay , ari , I'm retiring at 60 . Social Security is going to get turned on at full retirement age . That's given me seven years to be able to do really effective planning and that can be qualifying for subsidies until Medicare and then two years of conversions . Or it can be saying know what ?

I'm going to make sure I'm doing conversions the whole time . And why do we do a conversion ? A lot of you have heard my cauliflower example and if you haven't , I'm going to let you make fun of me because I chose this vegetable and people will make fun of me at the firm because of this vegetable . A lot of people like cauliflower .

But besides , the point , what I tell people with Roth conversions is it's almost like eating a little bit of cauliflower today . It doesn't taste great , but it's like paying for a little bit of taxes so that in the future you don't have to eat a ton of cauliflower , even when you're full .

So what you're doing is you're saying let me intentionally pay a little bit of taxes or fill up this tax bracket Maybe it's the 10% bracket , maybe it's the 12% bracket so in the future you do not have to pay taxes at 30% plus percent . And why would we do that ? Well , you can invest that difference in its tax-free growth forever .

So , as that's occurring , one it's limiting your RMDs in the future that you would be taxed at what we call the not-so-fun rate if you were to do nothing at all , but at the same time it's making sure that all that growth happens tax-free .

So it's kind of saying , okay , how do we look at where your tax situation is today and where your tax situation is in the future , to go what makes most sense ? So this is that tax-planing window that I just mentioned . So I hope that resonates . When you're working , your taxable income is high . That's a good thing .

But then you're going to retire and you're going to live and maybe there's a pension and a rental income or inheritance but let's assume there's not for the sake of the argument . You retire , you're living on cash or dividends from your brokerage account , so your taxable income is very low . You might be , for example , in the 32% bracket while you're working .

Then you're going to drop to the 10% bracket during this tax-planing window . Then , if you don't do anything at all , you're going to have significant RMDs and the reason for it is you're in the 32% bracket today . Then you go to the 10% bracket , you're retired and you might shoot back up into the 32% bracket . So why am I going through all this ?

You have a huge opportunity in that gap there . The question is what are you going to do with it ?

So that alludes to the question , the magic question today , of do you use the years in the tax-planing window to keep your income low to qualify for health insurance premiums , or do you keep income low to free up the ability to Roth conversion at a lower rate ? And here's the answer Ready it depends .

I hear a lot of you going Aria , I am not happy with you . I don't like that . It depends Answer that is not helpful and I know it's not . And just so you know , I listen to a lot of podcasts as well and when it's ever general like this or broad , I'm like I need a specific answer . What do I do Now ?

Of course , it depends on all these different situations which you realize , but I am still going to give you some helpful guidance and a way to think through it . This tax-planing window , the period of time you're going to have lower income , for most people , if you have a significant pre-tax balance , roth conversions are going to make most sense .

Okay , so for 90 to 95% of you . You're going . What do I do ? Do I keep income low ? Do I do Roth conversion ? Most of you , you're going to want to do Roth conversions . You are going to benefit tremendously from doing that , compared to keeping income low for health subsidies . Now , that doesn't mean it's for everyone . Let's look at an example .

Okay , okay , let's pretend you retire . You have an IRA , you have a Roth , you have a brokerage account . You can choose where you want to pull your income from and oftentimes you're able to do this really effectively to keep yourself in a low tax bracket . Then , as I said before , social Security and RMDs begin and then your income goes up .

So , part of the tax planning window , you have options . How do you keep your income lower ? That's the big question . The other thing to note before we go through my example is if you retire before 65 , of course , where's health insurance premiums going to come from ?

If you're married in 2022 , these are just old numbers I'm using here the federal poverty level was 18,310 . So 400% of that is 73,240 . That's for a family of two . Now there's something that's a cliff penalty . So even if you go $1 above this , you lose the subsidy . Hopefully this isn't resonating so far .

I know it's a whole lot here , but I'm going to I promise I'm going to bring it all back for you guys . So let's assume you determine . Just taking an example here , roth conversions make most sense for you because you are projected to have big RMDs in the future . So if you're like Ari I don't know the full analysis I want to work with you .

Of course we could do that and that's what I do for clients . But if you're going , ari , I just not at that spot . Yes , whether it's myself or I , currently I like my advisor today or I'm just looking for what do I do here ? I'm going to help you out . Let's just assume for most of you it's yes , you have a healthy pre-tax balance .

There's going to be big RMDs . Would you qualify for healthcare subsidy ? Yes , and it might feel good in the first few years , but then you're going to go . Well , I really wish I did conversions . Now , when you do a Roth conversion , it's eating cauliflower once again .

So if you eat a lot of cauliflower , what you're doing is you're increasing your taxable income . So the question is do you do this Roth conversion and go over that subsidy cliff to offset future taxes , or do you stay under the subsidy cliff and save money on health insurance premiums today .

So that would be a complicated analysis , but we're going to work through a few more details and then you're going to get the answer from me . So I promise I'm not trying to do this big suspense here . It's going to resonate even more when you hear the example . I always say this and I know it's annoying and I already said it , but it does depend .

Here's when I don't want you to think through this . So for a few of you going Ari , I'm following along a little bit , but I just don't know . Do I need to think about this , do I not ? It's not relevant if you're retiring after 65 . So ignore everything I just said .

If you're married , you're both of you you and your spouse over 65 , you're going to go on Medicare . So Roth conversions that's going to be the answer if you determine that's what's needed . Now you still have to think about something known as Irma surcharges .

This is going to impact your income , but the Irma surcharges are typically much lower than paying the full cost of health insurance . Just FYI on that . This one's going to not relevant if you don't have substantial amounts in your pre-tax accounts . I don't know what the magic number is because there isn't one .

But let's just take an example because I want it to be clear for you . Let's say if your total pre-tax accounts are and I'm just making up a number here less than 500,000 , you're approaching retirement . Odds are it's not going to be relevant . Just in my experience , if you have 500,000 to a million , it may be , it may not be .

But let's say , if you have under 500K in pre-tax accounts , you're going to likely not have to worry about this at all . Now you're going to meaning you're going to not worry about conversions . You're probably going to want to head towards that health insurance subsidy route . If you between 500 and a million , it's going to be may . Yeah , it could be helpful .

Maybe it couldn't be helpful . You're going to want to really do a deep analysis . If it's 1 million or more , now it depends on how much you want to spend in retirement , but more often than not , you're going to want to lean towards Roth conversions . Of course , hard to say exactly . There is a ton of great information out there .

But what does this depend on when I say it depends , it depends on how much income do you need . Do you want to spend 40,000 a year in retirement . Do you want to spend 200,000 a year in retirement ? That's going to greatly dictate what your RMDs are going to look like . What are your legacy goals ? Do you have charitable intentions ?

If so , that's going to play a big role here as well . What other income sources do you have ? Is there rental income , inheritance ? Do you have Social Security already on ? Are you listening to this ? Going all right , I'm doing part-time income because you say in your other episodes that can be really helpful for an early retirement .

How much is in a pre-tax account versus other accounts ? I know it's complicated and I get it , and I'm doing my best to keep it simple . This is why I go through all of this . It's designed to give you an understanding , the general landscape . It's less of a precise flow chart . Do this .

It means that , which I know is not helpful , but here's my example so you guys can go . Okay , ari , how on earth do I think through this ? So this is going to hopefully distill it for you . I start , when I do this for my clients , with a projection of what your RMDs will look like .

It's easier to do with software , but you can do it on your own and go what if I get X amount of growth on these IRAs and 401Ks and I need to start drawing them from them at 73 . No-transcript that I use is really nice because it adjusts for contributions and withdrawals and growth and conversions and all these different things .

But the goal of this the goal of Roth conversions in many cases is to reduce the impact of those RMDs at a later date . Also known as , in plain English , please reduce taxes in the future . There's other goals too , but reducing RMDs is a big one . A completely tax-free retirement is if you had everything and Roth IRAs and Social Security .

Now , that's not really the goal here . Some people go already . Oh my God , rmds I hear you talk about them . I don't want them . That's not the goal . The goal is not to get RMDs to zero , it's to get them manageable .

It gets hard , really hard , if you want to get everything tax-free and you might pay more taxes along the way than if you didn't do anything at all . So the first goal for most people is limit those RMDs , but we need to go through . Okay , that's not the only thing here .

What about legacy planning If your kids are going to be in a really high tax bracket ? I'm never a fan , really , of prioritizing kids planning over your own . But there are rare situations where it makes sense .

If you are over the estate tax exemption , which is $12,920,000 , that's going to come down when tax brackets revert , legislation reverts , then do do Roth conversions now , pay taxes on the amount to lower the total value of your estate , but then you have some more to pass tax-free instead of in an IRA . So you're going Aria , I heard what you just said there .

That didn't sound like English . There's some details around this and it's called income in respect of a decedent , but just an example . Sometimes it makes sense to actually go . Yep , we're going to prioritize your kids , not over you for solely , but it's because you can save a tremendous amount in taxes by doing so .

So not all the time , but that's if your net worth and liquid assets , should I say I'll primarily say liquid assets if it's over $5 million in pre-tax , we're going to want to look through that . So RMDs are going to be an issue , Not a clear definition , but here's what I'd look at First , what isn't it Meaning ? It's not having an RMD .

Let's say you have an RMD but it's only $20,000 or $25,000 . Probably not going to be a problem , because maybe you want to spend $100,000 a year . 20 comes from your RMD . Okay , that's only 20% . But let's assume your RMD is $200,000 and you only want to spend $100,000 . Well , I can imagine here you're here in this , going , aria , I only need $100,000 .

I don't want to take $200,000 from my RMD because a hundred of that is going to get taxed to . What you just said is the not so fun rate I go . That's correct . So will it push you into a higher tax bracket compared to where you are now based on future living expenses ?

Example today , if you pulled fronts from your IRA , it would put you in the 12% bracket if you're retired in this example . But in the future your RMDs might put you in the 24% bracket .

So I look at this and go why don't we pay a little bit of taxes or eat a little bit of cauliflower so in the future you don't have to eat a whole bunch , even when you are full ? Hopefully that resonates . So our RMD is going to be an issue . If not , roth conversions might not be effective for you .

If they are going to be an issue , to what extent ? How much would it save you through a Roth conversion strategy ? If that amount exceeds the savings to health insurance premiums , then do the conversion . That's really what it comes down to .

Once again , if the amount from doing successful and effective Roth conversions exceeds the savings from health insurance premiums , then do the conversion . Another thing to think through could they be mitigated by starting conversions at 65 ? Now , this is going to be interesting for a lot of you , and I think a lot of you are thinking through this .

But let's assume Medicare kicks in , which it will . Just so you know , at 65 , you're not going to have to worry about the premium subsidy . So what if you have a five to seven-year window and you could implement successful and effective Roth conversions ? This is what it would look like . Let's pretend you're 60 years old .

You're 60 years old and you know that you don't need to do a ton of conversions because RMDs aren't a massive issue , but you want to optimize your financial plan . What you might want to do is say what if , for the first five years , I am going to try to keep income low to be able to get that premium subsidy .

However , from age 65 to 70 , I am going to do effective Roth conversions ? It's almost like getting the best of both worlds , excuse me , where you're taking advantage of subsidies now and then you do Roth conversions after . So , after Medicare begins , that's a really interesting strategy for a lot of people .

Are you charitable inclined Charitable giving whether it's now or when you pass ? This is very important If you're going yep , I am charitable inclined RMDs can be fully or partially offset through something known as a QCD , a qualified charitable distribution . You can gift up to 100,000 a year per person directly from your IRA to your charity .

You don't have to take a taxable distribution on those funds . So if you have desire to leave money to charity , leave your pre-tax money first . Example let's assume you have half your money in an IRA , half in a Roth and 50% is going to kids when you pass and 50% is going to charity . Don't do the 50% Roth to charity and 50% IRA to charity .

Do full Roth to the children and do the other half to charity . So hopefully that makes sense . This is fairly high level what I went through today . I know there's a lot of nuanced details to it , but here's the summary so you guys can understand where I'm coming from .

Roth conversions truly have the potential for a lot of you , to save you hundreds of thousands of dollars , if not millions , over the course of your lifetime . I tell people my bad joke . I'm all about being patriotic , but not to the point . You pay more in taxes than you need to .

I want to save you a ton in tax of your whole lifetime , not just in one given year . So with Roth conversions , you convert at a lower bracket . Let that money compound tax free . Don't worry about RMDs as much . The end result lots more tax free dollars .

Then there's health insurance premiums the potential to save you tens of thousands in taxes , depending , of course , how long you're going to need that . That's when you think through okay , do health insurance premiums make sense ? I know I could save tens of thousands of taxes already just said that . But I've got this other RMD issue .

Okay , more than likely , if you have a healthy balance , roth conversions going to make sense . If you have less , or if you have called 500,000 or so , maybe health insurance premiums make most sense . But start with Roth conversions to see what the savings amount would be . If it's not much , then okay , look to keep income low .

If savings are significant , then use Roth conversions the first few years in the tax planning window . It may push you above that health insurance subsidy cliff , but for many people .

They'll be paying potentially tens of thousands of more in health insurance premiums in order to save what could have been hundreds of thousands of more in tax savings through conversions . It's a generalization . Obviously there's so many variables to this , but I hope this was helpful as a framework . If you're going already , I have a healthy pre-tax balance .

You went through a whole lot here . I don't want to screw up . I know that I only want to retire early once and I don't want to leave anything on the table . Then , of course , reach out to myself . This is what I love to do . Once again , I love creating retirement plans for people that want to retire early .

I don't work with everyone because I can't help everyone . I specialize in early retirement planning . So today's episode 20 minutes or so longer than most , but really helpful topic if you're looking at your situation . So hope that this resonated and I look forward to seeing you all next week . Thanks everyone .

Thank you for listening to another episode of the Early Retirement Show . If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom . That's earlyretirementpodcastcom , and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening .

Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .

Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .