The Complete Guide To Implementing Roth Conversions: Tax Strategy

An example , a review of the week , all of that good stuff . So a client came to me and they're a current client now . But when they came to me , they said Ari , my tax preparer sucks . That was the word they used . Okay , I said a little bit of a weird word , but okay , why do they suck ? They go .

Well , they didn't even tell me that tax brackets are about to change and if I do a Roth conversion , it's going to actually save me more on taxes now versus later . I said , okay , what else they go ?

They didn't tell me , if I inherit some of this money from my dad , that there's a schedule and I can optimize the way I pull income based on my income every year and all this stuff , I go cool , what else they go ?

They also didn't even tell me that , based on my current tax bracket , I'm in if , when I retire , I might be able to sell some of the stocks I've purchased and pay 0% in taxes . And I said , okay , they're never going to do any of that stuff . And they're like you agree they suck . I go no , what you're asking for is different from what we do .

So what they do they're a tax preparer , their jobs to repair your taxes and go John Jane , you know , if I do a good job for you , would you pay me again next year ? And it is a valuable job . They actually love us tax preparers . We do tax planning , which is all of the forward looking aspect of tax planning .

So how do we minimize your lifetime tax liability , not just a single year ? So I know a lot of you are just listening on the podcast app , but if you're actually watching this on YouTube , I'm pulling up a checklist just so you can see the difference , but I'll explain it , which down here in the corner you can see it says tax prep services .

They are going to prepare your return . Now , that's what I just shared from this person who came to me and they were upset . They're like why isn't my tax preparer doing the stuff you're talking about ? Well , they're never going to .

They probably have 400 clients and they're just so swamped they're trying to just file returns and they're probably playing catch up most of the time . We wanna be proactive so as things are changing , we can adapt .

So what you can see on my screen here , this is what we're doing , and , transparently , this is the main reason people are working with us , because it's yep , I need help with all the conversions and the harvesting and charitable giving and planning for Irma and estate planning and healthcare subsidy planning and real estate and what if I inherit a lot of money and

equity compensation and for my personal business and provisional income and all of this stuff that you're seeing here . This is what a tax planner does .

So tax preparers love us because we give them all the information they need to prepare their return , and we love them because they file it and so just want to make sure that you guys understand and maybe even stop beating up your preparer . Now some of you are like , look , I am my own preparer .

So others of you are like , nope , yep , this was helpful because I was kind of hoping my preparer would do that and I now understand why they are not doing that . So , with that being said , that's a quick , dopey story , but what I want to now go through is when does it make sense to do conversions ? Give you all the insight you're looking for .

I will start doing so by showing you two reviews of the week . So , if you don't already know , my name is Ari Taublieb . I'm a certified financial planner , I'm the host of the Early Retirement Podcast and I'm the vice president here at Root . Now , before I get into the fun , if you want to work with us and our team , there are two ways .

The first way some of you go look , I don't have $2 million yet , I will one day . Or I just want to be my own advisor .

Well , if you want to run your own projections and determine when you need to do conversions and go into all the weeds for what we're going to be discussing today , or you just want to optimize your financial strategy for a few hundred bucks . You can see I have an academy . It's not one-on-one guidance where you're talking to me .

Now you do have me with custom videos helping out , but that is why I do that option . If you're going , no , I want to work with you and your team one-on-one . That's where you can apply to work with us . Right now there is that $2 million minimum , and then right now I know there's a delay in just booking .

So some of you are like I'm trying to book but it looks like it's five months out . I go right now we're working on adding new team members , but I personally refuse to bring on more clients and have them get average service until we actually have the capacity to serve you in the way you deserve to be served .

So we are taking on new clients a limited number every single month so you can go ahead and look in the links for all that good stuff . Now that's the logistic stuff I have to get out of the way . Important stuff that I'm excited to talk about right now is look at this . So this is the first comment and I'll read it .

I know a lot of you are listening on the podcast app right now . It shows me all of the stats . So I mean not all of the stats I don't know where any of you guys live or anything like that but it shows me a lot in terms of who's listening audio to video .

About 40% of you guys , so approximately right now it's wild to even say , but the podcast is about 55,000 downloads every month and so 40% of you are just listening . The remainder are on video . So because of that , I want to speak to both of you , and I personally listen to a lot of podcasts and it's annoying when they don't explain things clearly .

And I'm driving so I totally get it , so you can see here . This comes from boating Charlie one , and boating Charlie one commented on a video I did where I said are you 60 with all pre-tax assets ? How do you minimize taxes ? Essentially do Roth conversions .

And he said hey , this was great , but it doesn't take into account the lost income from the money you took out for the conversion to pay the taxes . Now , if some of you are listening going , hey , what the heck is a conversion ? I'm going to give it to you in just a second , so just bear with me for two more . One more minute , not two .

Those tax dollars you decided to pay today could have kept growing tax-free in the pre-tax account and made a lot more money to pay the future taxes with . Can you figure out how much tax will be paid each year ? You did the conversion and use the standard growth you would have gotten if I left in the pre-tax account . I feel it'd be substantial .

I know what all of you are thinking right now . What the heck did ? He just say Okay , let me give it to you in English . This is like when you go to the doctor and I did this personally . I went to the doctor months ago . I said , hey , doc , that was great , sounded great , I think you felt like you did a good job there . No idea what you just said .

So , like , give it to me now . What they're saying very simply is if you do a Roth conversion , let's assume you go . Yeah , first of all , when should I even do a conversion ? We're going to talk about that . But let's assume you're familiar with what a conversion is .

When you move your money from an IRA to a Roth IRA , you're doing that to say I'm happy to pay a little taxes today so I don't pay a lot in the future . That's all it is . It's very simple . So what this person is saying they're saying hey , this was a good analysis .

But what I want more insight on is if I want to move $10,000 from my IRA to my Roth IRA , you're telling me I have to pay $2,000 in taxes to do that , to make the move . So I give the government $2,000 and they'll move $10,000 for me into this Roth IRA . So I've got 10 , I'm paying 2,000 to move it . So now 8,000 only gets moved over .

So what this person is saying is they're saying , hey , is this analysis taking into account that $2,000 that would have just kept growing ? What if I did not pay the 2,000 and I let 10,000 keep growing ? If I let 10,000 keep growing , wouldn't that be better than letting 8,000 keep growing ?

And so what I'm going to go through for this person is help them understand how to think through this , because they're not wrong , they just need to understand the analysis . So , first , what we're going to do , I know a lot of you are once again on the podcast app . If you're on YouTube watching this , look at what's on my screen right here .

Okay , this is the coolest gift I know . I'm trying to talk in the audio here . It is a cauliflower shirt . Okay , this was given to me by a listener . This is because you guys are awesome . The cauliflower shirt . What the heck does this mean ?

So , so I like to explain things in English , because when I go to anyone and they use fancy words , I'm like , hey , are you just stroking your ego right now ? Like what's going on ? Like I just need to understand this . So the way I explain conversions is like eating cauliflower . I am asking my client .

I will say do you want to eat only cauliflower when you are 75 ? And they're like no , I like steak and I like pasta and I like other things . I go , cool me too . Well , you're gonna have 80% cauliflower for the rest of your life , from 75 on . If we're not strategic here , they're like what ? I go ?

Yep , because you saved and invested so well into your 401k . Let's assume you're 55 . Right now You've got a million dollars and it doubles in 10 years , conservatively . Now you have 2 million at 65 . Now you have 2 million at 65 . Now you have 4 million at 75 . What happens is you're you have to take out , starting at 3.8% of your pre-tax balance at 75 .

So for most of you some of you at 73 , it's based on your age , but most of you will be 75 . As of current law , this can always change . So you have $4 million at 75 , just a hypothetical and you're going to be forced to start by taking out 3.8% of that $4 million , which is $152,000 .

Now you probably also have social security turned on at that point , so maybe that's another 50,000 . So now you've probably got 202,000 coming in , but you also have dividends and interest and maybe rental income and maybe a pension .

So maybe like 400,000 is coming in the door and my clients will stop me and go look , all right , I don't know if you're listening , I don't need $400,000 . I go , I'm listening , and the government does not care , and I don't want you to get killed on taxes .

And so we need to be strategic here so you don't only have to eat vegetables in retirement , like , okay , I kind of get it now . So what I'll ask my clients to do is to temporarily not forever temporarily pay a little bit in taxes today , eat a little bit of cauliflower to avoid having to eat a lot in the future .

That's the whole premise of why we do this . So they go yep , I'm on board , I get it . I said cool . So here's what I want you to think about when you're thinking about did you do a conversion or should you not ? A lot of you guys have head trash around hey , should I do this , should I not ? My neighbor says do it . I don't know if I should .

I'm gonna give you examples , but I'm gonna walk you through the five things real quick so that you do not have to worry about this . If you have worried , if you do not have a healthy pre-tax account , I want you to ignore and not worry about this stuff ever . So if you have a business that you just sold for $10 million , I have a client .

They were doing really well , they were making about $250,000 a year . Then their business just went to the sky and they sold it for about $6.5 million and they're like oh , we got to do a conversion , right ? I go no , that's all after-tax money you have , so you don't have to worry about that .

So if you have a business or you have healthy brokerage assets , a 401k , that that is where an RMD required minimum distribution would come into play on something like an IRA or a 401k . On anything else like a brokerage account or a Roth IRA , don't worry about it .

So some of you should consider doing conversions , even if you have a small amount in your 401k , because you might have $300,000 with $5 million from a business you sold , but the $300,000 will just keep growing . A business you sold , but the 300,000 will just keep growing and then eventually it's 2 million and you're going to have to take distributions .

So in all of that like , why are we even talking about this ? Everything you delay and then you get hit on later is hit at your highest marginal bracket . So I have clients spending 50% , like literally they're paying 50% taxes on what they've worked so hard for , which is insane .

So the point here is if you are going to be in a higher tax bracket in the future . So if you're like here I am , right now I'm making 250,000 a year , I'm in this current bracket .

But in the future , once I have excuse me once I've required distributions , once I have social security , once my pension's turned on all these things moving on , once that happens , I'm going to be in an even higher bracket . Well , maybe you should do a conversion to pay a little bit today to avoid a lot in the future .

If you're like look , right now I'm 55 , I'm working , or I'm 50 or I'm 45 , whatever , I'm enjoying my life . Things are going well . I don't know exactly when I want to stop working . Well , there might be a day that you're like I want to stop and you're 57 . Well , if you're 57 , you might be able to go . Well , I don't have social security .

I don't have any . I have a brokerage account I call it the superhero account to help you bridge the gap until 59 and a half , and I can live off of that . Well , you can live off of that and you can implement Roth conversions really intentionally pay maybe 10% , 12% , 15% taxes to avoid paying 25 , 30 , 35 , 40% taxes . That's a big difference .

That's millions of dollars that we're talking about , that you will be saving in taxes . That's why this is so important and why I get so emotional about this stuff , because some clients go well , if I just would have done conversions , I could have retired five years earlier . I go yeah , that's the power of good planning .

It's not me just saying this to save you on taxes for the sake of it . This is me saying look , if you're smart about money , you might not have to work as long . That's a pretty special thing to think about . That's why I love this stuff . So I'm not being mad at you guys . I'm just saying some of you guys go yeah , I think this maybe could help .

I go no , it's not a maybe , that this for some of you , if you do it and I've had people come and go yeah , I did a conversion and I'm like I wish you did nothing . They're like why I go ? Well , based on where you are and your spending and tax brackets and what you want to do .

You'll be better off to do nothing at all and you're actually , by doing conversions , forcing me to have to maybe tell you you have to go back and work longer , and I've had those instances . So you want to be careful when you're doing this .

But the first question is will I be in a higher tax bracket in the future and do you have a healthy pre-tax account ? If so , boom . Those two questions . You're probably going to want to consider conversions at some point . Number two required minimum distributions . What this means is you're going to be forced to spend a good amount of money at 75 .

Some of you are like look , what if I do a tremendous amount of luxury travel and all this awesome stuff from I don't know 60 to 68 , and then I don't want to spend as much from there because I did the majority of my travel . Well , if you did that and you spent a lot of money , I'm like , great , I'd rather you spend more money and do less conversions .

A I'm like great , I'd rather you spend more money and do less conversions . A lot of you are gonna be guilty of letting the tax tail wag the life dog . That's where you go . Oh my God , I wanna do all these conversions . I had a client come to me and they said this they're like help me optimize my conversions .

I'm like okay , I don't want you to do any . They're like , but you said I was gonna get killed . I go yep , you really should do it . They're like then , why zero ? I go well for your situation . You told me your mom's not in good health and I'd rather you spend more on this big cruise ship .

You said you wanted to take with her and next year we can do some of these conversions . And then you told me , personally , you don't wanna do international travel . So because you're doing domestic , because you're doing domestic , I want you to do this level of conversion and travel to this degree . And they're like oh so , don't just like , not do conversions .

I go no , don't just . Some people come and they're like I just need to save on taxes , no matter what . I'm like great work 40 more years and move to Florida , like . So some clients are like look , I take that personally offensive . I live in Florida . Okay , I like Florida , let's be clear . Okay , I like their tax code a lot .

But my point here is don't just move to Florida for the taxes . Now some clients are like , look , and this is my third point here Pretty good transition . Okay , guys , three and a half years into podcasting and I'm finally learning how to do this a little bit . So planning to change states was my third point here .

Some of you are like , look , I don't know where I'm going to live in retirement , but maybe I moved to Florida or Texas because of the tax or whatever and I'll go . Great , let me show you the magnitude before you make the decision . And they go wow , that's a big difference . That's $700,000 over the course of my lifetime .

I go yeah , I mean , you'd still be okay if you didn't do that , but it's a big difference . And one client said it's a big enough difference for me . I want to spend more and I don't love being here . And they were in Oregon . So they moved to Florida . Great , good for them . Now they're spending way more and they're really happy . I have other clients .

I showed a similar analysis too and I said what if you moved ? It would be the difference of about $400,000 . And they said would I still be okay ? And I said , yes , there'd be a difference of $400,000 , but yep , you would be okay .

They said well , then I'm not gonna move because my friends and family are here and yeah , I know I could save more on taxes , but I don't wanna live there . So for a lot of you you're like I don't care where I live , I just wanna be . Well , great , start doing some analysis . Others of you are like no , I would like being where I am , it's just .

If it's a no brainer , I wanna consider it at least as an option and I like showing clients that as an option .

So if you're planning to change states this is gonna get into what we're discussing and you wanna do a Roth conversion , well , if you're gonna do a conversion , maybe wait until you're in that state with a lower tax burden so that you get to save more on taxes .

If you're here in California and you do a conversion at the 12% rate just federally , should I say 12% you have to pay another 6% , likely in California taxes . So that's an 18% tax on the conversion versus in Florida or Texas . It's just the 12% . So that 6% tax savings . It's significant . So something to consider .

12% , so that 6% tax savings , it's significant . So something to consider . Number four is charitable giving , which is essentially if you're going to be doing charitable giving anyways .

What you can do is you can move money from your IRA to a charity of your choice and that fulfills your required distribution , which allows you to do charitable giving and minimize your RMD . You can also potentially do a donor advised fund .

This is a more a little fancy tactic but for a lot of you it's applicable where , if you're doing charitable giving or considering it , you can set up your own foundation . It does not cost $12 million . Generally . It makes sense if you're doing charitable giving in excess of 10,000 a year , generally not all the time .

But what you can do is you can essentially give to your own foundation . So I would give to the Taublee Foundation . That's my last name , taublee okay . I've gotten Tabooli and Teletubby and you name it okay . So what I can do is give $50,000 to the Taublee Foundation .

Now the Taublee Foundation can give money to any charity and I get a big deduction in the year that I do that . So let's assume I bought Apple stock for $10,000 and it grows to 50,000 , awesome , versus me going and selling that and paying taxes and giving to the charity every year where they actually get less money because once again I had to pay taxes .

Well , I can just give that appreciated stock position to the Taublee Foundation , in that one year I get a huge deduction and I pair it with the year where I get a big conversion which allows me to minimize more of my taxes , save taxes over the course of my lifetime . So that's , on the charitable front , the number five .

The last point here on once again , does a conversion maybe even make sense is legacy planning . Some of you are like look , if something happens to me , all this is going to my wife and then she's going to have to inherit this and pay a crazy amount of taxes . Others of you go I don't have specific heirs and because of that don't really care what happens .

I mean I want to choose where it goes , but that's not a big concern to me . And if you don't have strong legacy goals , roth conversions should not be as applicable to you . If you're like , no , I don't want my spouse and children to get burdened with a huge tax burden .

And you know , if I've got five million bucks and now my kids are making a healthy income and they have to pay taxes based on their current rate and you know they're crushing it as a doctor , well , that could happen and I've seen that case as well . So if you're listening to all of this stuff going , look , none of this applies to me .

I'm not worried about required distributions , I'm not going to be moving states , I don't do any charitable giving , I'm not worried about my tax bill and I have no legacy planning goals . Then don't do a conversion If you're like . No one of these , if not all of these apply to me . Well , this could make sense .

So let's go to my examples now and get you the hard data . So , in terms of my example , I have a few here . So let's assume the question that was brought to me once again was essentially , how do I know how much conversions I should implement ? So an example here . I've got it on my screen here and I'm going to read it out for you .

But if you're on YouTube , once again , you see me looking over here . I've built out my example . So let's assume you do a $10,000 Roth conversion at 20% . Okay , that's a $2,000 tax bill . So you pay 2000 in taxes . 8,000 goes to the Roth IRA .

If that 8,000 doubles , you now have 16,000 , eight times two , and now it's growing for you and it's all tax-free , beautiful , beautiful . So all I did . I said hey , client , based on your current tax bracket , let's assume you're 55 . You retired early .

You have very little income , maybe some coming from dividends and interest , but in this example , no rental income , no Social Security , nothing crazy like that . I want you to pay 10% in taxes . And they're like what the heck ? What's going on ? I go , just kidding , I was trying to keep it fun here . I want you to pay 20% in taxes .

And they're like why are you making me do this ? And I'm like well , I want you to pay 20% in taxes today because 20% of 10,000 is a very small amount . That's only 2000 . Imagine 20% of a hundred thousand . Well , they're like I don't want to spend 20,000 . I go , I know that's what I'm trying to avoid .

So by us paying a little bit today and it grows , you're saving a lot in taxes . If you want to quantify it for yourself while you're listening to this , go into the academy and play around with the conversion tool and you will see it for yourself .

Now , when I'm doing this , what the question was original question was hey , what if I didn't pay that $2,000 in taxes and I just let my $10,000 keep growing and I avoided any of this stuff you're talking about . Well , let's talk about it . Let's assume that 10,000 kept growing and it doubled and now it's $20,000 .

Okay , so in the first example you have 10,000 , you pay 2K in taxes . 8,000 goes to your Roth , grows tax-free , doubles to 16K . In this new example , you don't do anything . I just said completely avoid it and you do no conversion and you let your $10,000 grow to $20,000 . Well , what is 20% of $20,000 ? That is $4,000 people . What does that mean ?

Well , in my first example you have a Roth conversion where you pay the 2K I know I'm explaining it again and again , but it's want to harp it down here . You pay the 2000 and now you have 8,000 , that8,000 . That doubles . $16,000 is tax-free , never pay taxes , ever again . If that $16,000 keeps growing and growing and growing , you never pay taxes .

Versus example one your $10,000 grows to $20,000 . You've now got $20,000 and now you pay $4,000 in taxes . So you pay $4,000 in taxes because at some point you have to . And let's assume it's the same 20% tax bracket you're in . Well , now you have $16,000 because you just paid 4,000 taxes .

So the only difference here there's no difference in terms of what you're ending up with If tax brackets were to stay the same forever , and that's why I use this example . If tax brackets stay the same forever , there's no difference Whether you pay 2,000 now or 4,000 later . You both have $16,000 at the end .

The difference is the first person has it all tax-free . Now they have $16,000 . That once it grows to a million , they never pay taxes ever again . The other person , when that $16,000 keeps growing , well , they're going to have to pay taxes on that when they eventually take it out .

So this is quite simply the benefit of a conversion is yeah , you happily paid $2,000 in taxes today to never pay ever again , versus other person who's going to have to pay 4,000 . And then , as that grows , and now they have a million bucks , well , now , if they're taking 20% of a million bucks , that's 200,000 taxes .

So this is what the benefit of conversions can look like . So what does this mean for you ? Well , tax brackets are not going to be neutral . I'm just giving this example for simplicity for the person that asked the question . Tax brackets are not going to be neutral . Right now , you're a human , you're not a robot .

You're probably making a healthy income , and so you're probably making north of $300,000 , $400,000 , or $200,000 , whatever it is You're probably paying , let's just say , combined 30% taxes Don't know exactly , but 30% . Well , right now you probably should not do a conversion . Why would you pay taxes at 30% to avoid paying taxes at 15% ? That doesn't make any sense .

But if you're right now in a healthy tax bracket and you're thinking maybe I retire next year , you retire next year and your income's low , and let's assume , for hypothetical situation , you're 62 . And you're going to be retired at let's just say , excuse me , you're retired , you're going to turn on social security at 67 .

That gives us five years to implement strategic Roth conversions before social security gets turned on . Because once that's turned on we don't have as much room to fill up brackets . And I once did this for all of this for a client . They're like this is what I want my tax person to do .

I go , that's not what they do , they're just going to prepare your return . What we're going to do is everything you're hearing right now . So the point is all of the conversions , what you should do . The reason there's no , you know a lot of you guys have seen this . But this jar you can see right here , it says anti-cookie cutter jar .

Okay , because I don't . There's no cookie cutter answer to fill up this exact bracket . And do this because you know what . I might go to you and say , yep , we should do conversions , but you want to spend more the first few years of retirement . So do less conversions and spend more . Engage how much you'd love to spend in retirement .

Well , I just told them not to do a conversion . I just told them to spend more and enjoy their life more . And they're not going to be . I promise you , at 80 , going , ari , why didn't you tell me I did a greater conversion ? They're going to be going . I'm so glad I took those extra trips and I loved it .

Now I don't want them to get killed on taxes so I might go next year . You're not taking as many trips next year . We're doing this conversion and here's why they're like OK , I'm cool with that . So this is the type of analysis you want to know .

Ok , great , if you retire at 55 and you don't know income gets turned on , no distributions for 20 years you might need to do a little bit of conversions every year . If you're going , look , I've got five years or two years before social security gets turned on or my pension starts . You might need to start doing a lot of conversions .

It should be dependent on your strategy . So hopefully this was helpful . If you want to run any of these projections on your own , that's why I have the Academy you can go in there and do it and I help you do it . If you're like , no , this is too much , I want to work with you guys and your team .

That is why we exist and I encourage you to reach out . So if any of this episode was helpful , enlightening , anything like that , I invite you to share it with friends . That's how the show continues to grow . I invite you to leave a review . I love seeing the reviews , all of the comments . This is what I love . So that's it for today's episode .

I know a little bit of a longer one , but hopefully helpful . 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 .