Spend RMDs, or Reduce Distributions and Taxes With Roth Conversions? - 498

Hawkeye and Elle are age 61 and  in the 32% tax bracket. How should they get money into their Roth accounts for tax-free  retirement income? Clark and Ellen are 69 and 68, expenses will pretty much be  covered by their fixed income, but they’d like to leave Roth money to their  kids. Should they keep converting to Roth, or use required minimum distributions for their  living expenses? Tom and his wife are 73, and

We got Hawkeye and Ellie. Ellie Woods from  Hotlanta, Georgia.  Let's see. It starts out a little negative.  “Sent this 3.16.2024, but  don't believe I've ever heard the spitball. Did I miss it?”  Well, I don't know. That was  a long time ago. It was almost a year ago.

You know what? I missed  it. For the first time ever, I completely missed the email from Hawkeye  and Elle Woods in my inbox and so it didn't get to you guys until now, which is why it's  at the top of the list. So sorry about that, Hawkeye. Hopefully we'll  get you some good answers.

All right, here we go. Let's  see.  “Please advise. Okay, so married, we're both 61, two kids, younger one graduates  college in May of 2024. I'm an academic-“

Internist.

Internist. What's an academic internist?  Apparently I'm not an academic internist.

It's a doctor.

Yeah, well, internal medicine is, I mean, it's  a doctor, so academic means probably teaches it.

So I believe Hawkeye and Elle Woods is  in reference to what they do for a living.

Okay.

Hawkeye from M. A. S. H.?

Uh huh. And Elle Woods from Legally Blonde.

Oh, Okay. Okay. Okay.  Very good. Now we're with you.

Now we're with you. Internist.  That's what I'm going to-

Internist? You want to be an internist?

Yes.  “-doing patient care and teaching  residents, medical students. My wife is a lawyer working for herself in our home since 2009,  when her firm reduced staff. Her early financial projections had her retiring at 45, then 50, then  55. Then I just stopped.  Since the gym reopened, I resumed biking to work two days a week.  Otherwise, I drive a 2008 Mercedes E350

Lillet.

Lillet.

Apparently it's a tonic  wine, which is basically vermouth.

Oh.  Well, I know Vermouth, but  that sounds a little fancy-nancy to me.

Yes.

It's probably because  he's a, what is he again?

He's an academic internist.

Internist.

Yes.

Academic internist.

Right. I know. It's something you always-  you wanted to be that or a financial planner?

Well, it was, you know, it was  one or the other and we know where I, where, where, where the apple fell there.

Yeah. We do.

All right. “Ellie enjoys an occasional  dry cider. Total assets, $7,000,000, consisting of $5,500,000 in tax-deferred accounts,  $230,000 in Roth accounts, $520,000 in a 457(b) and $820,000 in a brokerage account, with  about $266,000 of that in cash.” Okay. “2023 workplace retirement contributions totaled  $147,000, all tax-deferred, $520,000 403(b), $22,000 in my 457, $73,000 to the wife's 401(k),  also did backdoor Roths for the past few years,

Well, they didn't say, but  yeah, we'll go with that for now.

Well, if she's going to continue to make  a couple hundred thousand dollars a year-

And he's going to go to halftime.  Yeah, you're probably right.

So they don't need any of these dollars, it  looks like, at least for the next 5 to 10 years.

Right.

So, they’re 61, in 10 years they’re 72,  that's going to be $11,000,000, $12,000,000, potentially, if they get like a 6%  to 7% rate of return, depending on how much money that they continue to  save in their retirement accounts.

Even if they don't save  anymore, just rule of 72, it's going to be over $11,000,000  by the time RMD age comes, comes in.

And they won't need to touch any of those  dollars it seems like from now until then, because she's going to continue to  work and he's going to work part time. And then he thinks he spends $150,000  to $200,000. If she makes that, I mean, it's still a small distribution compared  to the liquid assets that they have.

Right. Yeah. So yeah, obviously they're fine, in terms of investments for their spending,  but the real question is what do they do now? They're in a high bracket. Should they go Roth?  Should they stay deferred? What do you think?

Well, let's just assume  that the tax-deferred assets at RMD age is going to be $12,000,000 bucks.

Yeah.

Well, that’s a big RMD,  right? That's like $500,000.

That's about $500,000. Yeah.

So that's ordinary income plus  Social Security on top of that. I mean, do you think they're going to be in a lower  tax bracket at RMD age than they are now?

Not unless they do a lot of  Roth conversions at some point.

Right. So it's either planning  over the next 10 years of how much that they can get out to keep  them out of the top bracket.

Right.

I would, I would try to go all Roth right  now because of the time value of money. I think we'll carry that. You have to run the numbers  here, but I just looking spit balling this, they're always going to be in a high tax bracket.  And if tax rates go up, It's going to affect them more than someone in the 12% or 24% tax bracket  in the future. They're gonna, they’re gonna tax higher at the higher rates. So, I would try  to revert from going deferred and do all

Well, you can dream about it. Okay. So, yeah, I get it. And there's a certain logic in  there and I would do totally the opposite.

You'd still go deferred?

I would. Yeah.

Then you would convert?

I would, I would, when I retired. So, so  like, let's say in 2025, I'm working halftime. Now there's some room in the 24% bracket.  Now I'm starting to do some conversions, or at least at that point, I'm, I'm going to go  Roth on my contributions. I basically want to fill up the 24% bracket and then 2026, maybe I'm  completely retired. The problem is the tax rates

Yeah, but we're just  talking about peanuts. I mean-

Compared to everything.

You know what the hell? I  mean, it's like $7,000,000. You, you switch your contributions to Roth. It's like,  okay, well now I got $5 in the Roth. You know?

Yeah. Well, you still got  $5,500,000. That's gonna be $12,000,000.

Right. I mean, it, it's  not gonna do a ton of damage, but you're right. You have to do  conversions when he goes, part-time.

Yeah. That, that's what I would do.

And then he's looking  at rates. will be at 39.6%.

Yep.

At that probably income level, but we're predicting the future here. I  have no idea what rates are going to be, but if you think rates are going to go  up, then you want to pay at lower rates.

Right. So yeah. Yeah. Right. So there's  logic in that, given that we have a lot of debt in our country and will taxes go up?  Probably at some point. So I get your logic, Joe, I just would have a hard time doing that.

All right. I'm sorry it took us a  year to answer this.  Hopefully that helps.

I’ve got good news for ya, it’s that time  once again: the DIY Retirement Guide is our Special Offer right now, and it’s only available  until some time this Friday! Nearly all our other white papers and guides and handbooks are always  freely available in the Financial Resources section of YourMoneyYourWealth.com, but the 40  plus pages of this guide are packed with so much practical, do-it-yourself information that we only  make it available on a very limited basis - and it

“Hey guys, great entertaining show  and better information. My writing is worse than Joe's reading. So this should  be fun.” Oh my gosh.  My reading is so bad. It's so embarrassing. I don't know why  we continue to do the show the way we do it.

Because it's entertaining.

We're gonna just make  an AI person read this stuff.

We should, yeah.

“We are the Griswolds, Clark and  Ellen.” God, I love the Griswolds.

Yeah, I did too.

Remember? I used to  call you Clark all the time.

Yeah, yeah, I think you still do sometimes.

You are Clark.  “Important facts. I'm 69,  Ellen's 68. We retired 11 years ago. I was an IT manager for a school district. And Ellen,  a kindergarten teacher in State College, PA.  We are Penn State University, where  Penn State University is located. Go Lions! Go Lions! A little wide out.” You guys  didn't get that reference, did you, Big Al?

No.

Okay.  Or as the saying goes,  “We are Penn State.  There's an interesting story behind that chant  that you could look up here if you're interested. Here's the link.” Okay.  Yep. I didn't look that up. Sorry.

The cheer “We are… Penn State was first  used in 1976 when they were inspired by the opposing team's enthusiasm. And while it took  time to catch on, it became a tradition by 1981. It also holds historical significance because it  was used in 1946 when the Penn State football team refused to play a segregated game.” And when they  were asked why, they said, “because we are Penn State”. In other words, they're a team. They're  not going to play without their black players.

Okay.

Very well done, Andi.

How about that?

“Currently living in Tettesville, Florida.”

I think that's Titusville.

Titusville, Florida.  See my reading is top notch.

I take it Titusville is not  anywhere near where you went to college?

Tired again. I was gonna say Tittysville or  something, but I was like, that can't be right.

Well, you moved the U where the I  was, and you, and you skipped the I.

So, yeah. “We watch all the rocket  launches from the driveway.” Alright. “Akron Aerospace Force Station is  only 10 miles away.”  That's cool. “We travel 5 to 6 months a year in  Airstream Atlas Motorhome named-“

Nittany. You know, like the Nittany Lions.

So if you have an Airstream, are you  supposed to name it? Is that the deal?

Some people do.

Yeah, my best friend Mikey Martin  has an Airstream, and he named it.

Do you name your car?

No.

Me neither.

No.  Car.  I have to get  in my car. I'm like, I have to get in Little Johnny to go  down to the grocery store.

When I got my Tesla, I  was supposed to put in a name.

A name.

Yeah. So I didn't know what to do. So I-

You called it car.

I put, I put Tesla. Joe: Oh, yeah. I don't know. I don't know if I could  hang out with someone that names their automobile.

Which is worse? Talking about yourself  in the third person or naming your car?

I think it's both. If someone, if someone names their car, they  definitely talk in the third person.

They probably do.

Joe's got to get little  Johnny to go to the grocery store.

Little Johnny, come on over. We're going.

I've got to get Clark  some new ho ho hogagoggin. Oh gosh. All right, Airstream.

Okay.

Yeah, his name, was, like, he  named it Dolores or something, or Doris.

Oh yeah, I think you're right.

Yeah, I don't know. That's  just out of my league. All right, Big Al.  “It's not hard to dump your  tanks and get rid of the smelly stuff.”

Yeah, well.

Al had previously mentioned that he wouldn't want to be in a motorhome because of  the fact that you have to do that.

Yeah, maybe I'll rethink it.

All right. “We love sleeping in  our bed every night.”  Okay. Well, that's nice. “We have been to East Mount- East-“

Eastern-most.

Well, thank you. “Eastern-most point,  Southern-most point and the Western-most point and the Northern-most point in the lower  48 states.” Okay. So he's been all over the US.

Yep.

“Also, we have swam in Atlanta,  Pacific, and Arctic Oceans. The Arctic Ocean swim was after a 600-mile one way drive  on a dirt road, Tooka Yucca.” (Tuktoyaktuk)

That's in Canada.

It’s a really nice place I heard.   Oh boy, this is, this is, this is tough.

Oh, he says “Joe, can't wait until I  hear you pronounce it.” Let me, let me try it. Took, took, took, took, took, took, took.  Tuk, tuk, toe, yuck, tuk. Tuk, yuck, tuk, tuk.

Tuk, yuck, tuk, tuk. “We got two dogs,  13-year-old Australian Shepherd and a 3 year old miniature Berniedoodle. Okay, alright. “We drive  a 2018 Jeep Wrangler and the Atlas Motorhome, normally towing the Wrangler. Drink a choice  about any dry red wine. Financial stats.” Finally. Jeez. “We're both collecting Social  Security, total about $60,000 a year. We each have a PA State pension, Ellen's $14,400  and mine $63,000.” All right. “Ellen gets

Yeah, it's $137,000 of fixed income already.

Right.

Yep, so that's 24% bracket,  or 22% bracket currently.

So, yeah, I would do conversions at the  top of the 22% tax bracket. The reason why you want to keep money in an IRA is that you can take  those distributions out tax-free in some cases, or you use the 10%, or you use  the 12%. But if you're already, if you're getting the 22%, which will be the 24%, it probably makes sense to convert it to 22%.  And then when it gets to 24%, maybe you don't.

So I think I would let it be.

Okay.

And, and here's why, because if the, if  the pensions don't, they're not adjusted for inflation. So eventually, if it's only that,  they'll probably pop down to 12% or future 15% bracket and if they're going to use the  money for either the kids or for health for like a retirement, you know nursing  home then that's fully deductible anyway, so if you pull it out you get a tax deduction.  And the RMD you know, whatever it'll be $10,000,

Yeah. It's $277,000 compared  to the $1,500,000. He's already having Roth. It was, if it was reversed. Yeah.

If it was reversed, of course you would. Yeah.

All right. “I've been to conversions up to the IRMAA limit. Now laugh at  me.” Why would we laugh at you?

No, you did well.

Because you're at the IRMAA limit? “We  could convert the $277,000 over 5 years and have everything in the Roth, and non-taxable for us and  the kids. The RMDs. If we don't convert properly, we will not change our tax brackets, but tax  rates may increase. Second question.” Okay. “The $1,100,000 of Roth accounts and the  traditional IRAs are invested in Fidelity, professionally managed accounts, 95% Fidelity  mutual funds, which are 55% to 65% US stocks,

I think it's 60%.

Thank you.  “I picked a lower  bond percentage because I had no plan to spend the Roths. Now I'm wondering  if I should increase the bonds in the personally managed accounts to 20% or 30% of  total investments. So if stocks take a dump, I can sell the bonds to buy stocks at a  lower price, or even personally invest in those 3 funds. Any spitball will be much  appreciated.” Alright, Clark.   Heck of a job.

Yeah, very good job.

So I think we talked about you could go  either way on the conversions.  So he’s asking us about the Fidelity account. Should he keep  those there? Yeah, that seems fine. I don't know.

Yeah, the Fidelity account seems fine.

Should he have more bonds?

I guess that's the real question. Should  he have more bonds so that when stocks go down, he could then buy bonds, I  mean, buy stock at lower prices, which there's some logic there. However,  if you just hold more stocks long term, you'll do better long term. So, if  you don't necessarily need it and-

Here's the problem. It's the stomach factor.

Well, it's true. Yeah, because now Clark has  a lot of money sitting in Roth accounts that is 100% tax-free that he's going to be looking at  the balance again when he's on his Airstream. Right.

And going to the Northern-most point and the Southern-most point and the  Western-most point of the whatever.

Yeah.

And so he's going to log on again,  and then if he sees that account down 20%, 30%, that $1,200,000 is now let's say $800,000.

Yeah. Then what?

What’s he going to do? He's  probably going to freak. So, or just something, right? So  having that much risk exposure, I think is the right move because he doesn't  need the money and it's for his kids.

Correct.

However, is he going to have the  discipline to, to maintain that strategy?

Yeah.

I don't know if most  people have that discipline.

Yeah. And that's, I think  that's really well said because yes, that's the right answer is to stay more in  stocks if it's long term and for the kids, but can you handle it? Right.  And, and, oh, only, you know-

He wants $1,000,000 for each  kid. Right. Is that what he says?

Something like that.

So then you almost get to that $2,000,000  mark and then the mark takes a dump. And then now you got $1,600,000. If you're like, oh, I almost  reached my goal. Now it's $1,600,000 kids. Now the kids aren't going to get $1,000,000. The kids will  still be fine, but, but I think it's the, the, the discipline to make sure that they stay the  course with whatever strategy that they put forth.

I think one of the ways you can think  about this is if you're a long-term investor, like probably they Clark and Ellen are like,  what did you do during the great recession? Right. And 911 and all these other-

You know, what they say to  themselves. You know, people's memories-

They're short.

Oh, I bought more. Until  you met with them in 2008, when they're like freaking out. I'm not saying  that Clark and Ellen were, but right. You know, we talked to so many people. It's like, okay,  well, what'd you do in 2008? Oh, I wanted to buy more. And then you look at it's like, you  see all these losses on their tax return.

Yeah. They sold everything.

It's like you sold  everything and you went with cash. Well, the other thing you see is like when  the market's doing well, as over the last decade, it's done rather, I mean, there's been some dips,  but it's done really well. And then people say, yeah, I can handle it. And then the market  goes down 50%. It's like, I can't handle it. There's no way. I mean, even  the most disciplined investors, it goes down 20%, 30%. That's scary.  That hurts.  The more money you have,

Yeah.  You know, that's,  that's well said again, because the people that we see that have  more money, they worry more, don't they?

For sure. Cause they're  totally fine financially.

Yeah. They don't even need it. Yeah.  But  whatever. Anyway, I think that's right. I think you stay in stocks, but can you handle it? I  mean, that's that's the that's kind of up to you.

All right, good luck.  Thanks for the lovely letter.

Do you know what your financial future  looks like? Now there’s a quick and easy way to find out your likelihood of retirement  success – with a FREE Financial Blueprint! Click the Financial Blueprint link in the episode  description to get started. Input your details, and our new tool will analyze  your current cash flow, assets, and projected spending for retirement. It’ll then  calculate three scenarios to help you determine

We got Tom from Las Vegas He writes in. He  goes “Greetings Joe, Big Al and Andi. My wife and I are avid fans of your show.” Avid.  How can you be an avid fan of this show?

I guess some people like it, I don't know.

You think you're a  pretty big star, don't you?

Not really.  How about you?

Noe.

You can hardly wait to go to Costco  because everyone's going to recognize you.

Yeah, you know how much anxiety  I would have if I went into Costco? I don't know what it is because I think I  worked at a grocery store when I was a kid.

Oh, you don't go to Costco?

I don't go to Costco. I  don't go to grocery stores.

You don't?

No.

Nothing.

Nothing. I can't handle it.

You make Rosie do all that.

I can’t handle it.

I can't handle it either. I can't  stand grocery stores. For 13 years that I've been with my husband, he has always  done all of the shopping, and the cooking, and the cleaning, and I, I'm so grateful  because when I go to a grocery store, I need to take a nap afterwards. It's horrible.

Really?

Yeah.

I don't know if it's the lighting.

Maybe too bright, just like the studio.

It's like, it's like,  I don't know. It's like, oh gosh, get me out of here. Then I  always pick the line, you know, with-

Oh, the worst line.

Yep. Anyway, I don't know  how we got on that, but okay.

Because you were afraid of getting noticed in the store. Somebody coming up to  you and saying, you're Joe Anderson.

That doesn't happen.

“We're catching every new episode and burning  through the long list of past shows.  We're both 73. We have adult children, grandchildren who will  inherit our traditional and Roth IRAs.”  Okay. “I have a pension of $75,000 which exceeds our  annual expenses. We each currently have $200,000 in our Roth IRA accounts. The combined total in  traditional IRA accounts is $3,200,000. In 2024, RMDs was a whopper at $120,000, and the chart  shows the figure skyrocketing to $180,000 over

It is.

That's why we've talked almost  20 plus years about conversions.

Getting more money to Roth. Joe Getting more money. Being diversified. Yeah.  Tom is living the tax time bomb right here. Well he is and his pension is $75,000.  He's spending less than that so all this money is extra and so he's going to be paying  taxes on money he doesn't really need.

Yep. “We are wondering what you think about  us doing a large Roth conversion. Maybe $500,000 per year starting this year. Our reason for  wanting to do the conversion is to reduce the future RMDs. We could cut our RMDs in half by  doing this over a 3-year period and possibly also reduce an IRMAA after the 3 year plan is completed  this year's RMD will put us right in the middle of the 24% tax bracket converting $500,000 in 2024  and ‘25 should put us about $60,000 in the 37% tax

Yeah, $3,200,000 in IRAs, and  so that RMD is going to be up there.

So he's doing some projections. It looks  like, all right, I got $3,500,000. It's going to continue to grow at 6%, and I'm taking my RMD  out each and every year. It's going to $120,000, then it goes to $180,000, and then as I get  a little bit older, it's going to go up to about $350,000. So there's really no way  out of these large brackets. So he's like, well, you know what, why don't I convert  half of it out over the next 3 years?

Right.  That's what he's saying.

He's like, I got $3,000,000. Let's go $1,500,000 out. Yeah. Pay the  tax over a 3-year time period.

Right.

What do you think of that?

I wouldn't do that.

I would not do that  either, Tom. Do not do that.

I would fill up the 24% bracket and I  would continue to do that with your RMDs.

Yeah, take the RMD first and then you  continue to convert to the top of that bracket.

It's no- converting after RMDs, this  one is for the kids. So keep doing it, right? Get as much as you can. Keep  yourself out of the higher brackets to the extent you can. The kids will  be happy you get the Roth IRAs. Maybe you'll want to spend more someday than  $60,000 or whatever the number is.

Right. Tom, you live in  Las Vegas. I don't know. Just walked down the street.  Put $100,000 on black.

You can't go to dinner for  under $300,000. I mean, $300.

Yeah. If you convert $1,500,000 over the  next 3 years, that's the, no, don't do that.

That's too much.

Yeah. It's way too much. you can continue  to convert all the way through your entire life. You can do death bed conversions.  We've done that before too. That's morbid.

It's morbid, but that’s  because it's for the kids.

Right. So let's say, God forbid,  Tom passes a little bit early. You can still do a conversion in the year of death.  Right.  Anyway, looking at your situation, great job on the savings. Thank you for  listening. Thanks for the, the question.

Oh, the second part of  the question, S& P500 index.

Nah, you've got way too much money to be, I don't know, he's trying to  be Warren Buffet. I don't know.

I guess. I, here's what I would  do. I would do the total index fund, total stock fund. I do a total international fund. And if I felt so inclined, I'd do some bonds.

Yeah, I don't know. I think I would be a little- you're leaving money on  the table, I think personally.

Well, you really only have one asset class.

That's it.

Yeah.

So, I mean you could- I would want to be  a little bit more diversified have some global, you know, exposure. I would if you want to take  on a little bit more risk in the Roth accounts. I mean you could be a little bit more  sophisticated in the strategy, right? Right and then from a rebalancing perspective,  you can manage the risk a little bit more. I mean, there's a lot of advantages of having,  you know, more than one asset class,

Yeah. And by the way, we're talking about 2000  to 2010 and that is true. The S&P 500 went down 10% over that 10-year period, but a globally  diversified portfolio did pretty decently.

Did quite well.

Yep.

Okay. That's it. We're done.  Enough  of the tongue twisters for today. Alright, movie recommendation for  you though, before I leave.

Okay, what do you got?

I think you're gonna love this one.

Yeah.

Ballerina.

No way.

Nope?

You actually have switched bodies then?

You know John Wick?

John Wick, no.

You've never seen John Wick?

No.

Never heard of John Wick?

No.

Oh my gosh.  Andi,  have you heard of John wick?

I've heard of John Wick. I'm sorry, I have not seen it. I'm a fan of Keanu Reeves  and I have not seen the John Wick movies.

So. there’s 4.  So Ballerina  is about, she’s a badass killer.

Okay, sounds like your kinda movie.

Oh yeah. It was, it was nuts.  I think you'd really enjoy it. Killed like  45 people in like 30 seconds.

I get my popcorn.  My lemonade.

I think you'll last about 30 seconds-

Get my pajamas on.

-watching that one.  Oh, all right.  Andi, wonderful job, thanks for everything.

Thank you.

Big Al, good to have  you back. How was Africa?

Oh, we had such a good time.  So many animals, elephants, lions, and giraffes, the whole ball of wax, no  tigers or bears, but African animals.

Got it. All right.  Aaron, good job  in the booth there. Thanks buddy.  We’ll see you next time, folks. Show's  called Your Money, Your Wealth®.

Next Week on the YMYW Podcast

So there you have it - what do you think  of our new video podcast format? What do you think about The Derails happening in real time,  instead of at the end of the episode? Leave your honest reviews, comments and ratings for Your  Money, Your Wealth in YouTube, Apple Podcasts, Spotify, and anywhere else that accepts them,  or just click Ask Joe and Big Al On Air in the