Converting to a Roth IRA: Is It the Right Move for Your Retirement Savings?

The Truth About Roth Conversions

Should this couple pursue a Roth conversion?

Roth conversions sound good. Everyone promotes them as if they're always the best option.

But are they always the best option? I'll show you a case study of a real family we'll be meeting in a few weeks.

You'll see the same story they have to watch and face the same questions they have to face. You can decide what you would do if you were in their shoes.

Now personally, I don't think this family would be willing to do a Roth conversion based on what they're about to see.

But it really depends on the answers to two key questions. Once you know the answers, be sure to let me know in the comments whether you'd consider a Roth conversion.

Look, we have many questions about Roths:

• Why should I do a Roth conversion?
• Should I do it all at once and get it all done in just a few years?
• Should I take it slowly?

So, it can be difficult to decide between right and wrong, and software can help.

So we'll look at his story and try to make it a little clearer. And we're here to help you regain your path to liberation with peace and clarity. Different beginnings happen.

We looked at a case. Of course, we changed their names.

Now they're Timmy and Tammy, okay? So Timmy is 65 years old, and Tammy is 64 years old.

We can look at a simple breakdown of this: You can see that their income, since it's the beginning of retirement, includes a small amount from Social Security, a pension, and a significant amount withdrawn from their portfolio.

If you look at the data here for a few years, you'll see that this amount decreases when Social Security kicks in. That means, when Social Security kicks in, the portfolio withdrawals decrease.

The pension is about the same. On the right, we can see that he has about the same amount, and in fact, he has 1.284 million today.

This amount is already divided among a Roth IRA, some traditional IRAs, and an HSA. He has $60,000 in his bank account, and his home is worth $493,000.

There's no debt on it. So this is Timmy and Tammy. And there's a lot of software that can do Roth conversion analysis, and I really like the software we use.

“Okay, if you do a Roth conversion in the 22% bracket, this is the best option. And then it compares it to the other options.”

For a taxable, tax-deferred, and tax-free strategy. Now, if you've ever asked the question, “What happens if I get too aggressive?”

We can actually consider this and say, 'What if we get really aggressive?'

So in this family's case, if they do a Roth conversion in the 35% tax bracket, their average tax rate would be 6.7%, and they would pay $258,000 in taxes over their lifetime.

The software says, okay, if we did 22%, then if we did those Roth conversions to 22%, we'd actually pay a little bit less.

About $330,000 less, or $224,000, and our average tax rate is 5.98%. Well, that satisfies some of the curiosity.

And we can see that if we adopt strategy one, the average tax rate will drop to 4.3%, down from 10.3%.

If they pay $342,000 less in taxes, they'll have $342,000 more in income, because if you give fewer dollars to the government, you can keep more dollars for yourself to spend, and then their inheritance will be about $600,000 more.

Okay, so at first glance, it looks great. But when we look at it, that is, when this family sees it, I wonder what will happen next.

So, do you see these blue boxes, these blue bars? This means we'll have to pay $334,000 in taxes for this conversion. And if we hadn't done them, we would have only paid $8,600 in taxes.

So you get the gist here: We'll end up paying our taxes in 2029, whereas if we don't do the Roth conversion, we'll have to pay significantly less tax for several years.

Now you might say, well, they would say, if we do the Roth conversion at 12%, which will soon become the 15% tax bracket, the difference in total tax would only be $6,000.

So let's click and save this for a moment. Now we're comparing a 12% and a 12.5% ​​Roth conversion. And now we can see that's exactly what we're doing.

It's more than that, not as aggressive, right? So $133,000 in taxes, or $14,000 in taxes versus $6,500 in taxes.

Okay, and then we'll do it for even longer, but that might be more acceptable to some people, right? So it's up to them.

This means that they will fall into the 15% tax bracket because they will be maximizing these conversions, optimizing them.

And if they fell in the 22% tax bracket, their loan would be repaid in five years.

But if they fall into the 12.5% ​​tax bracket, they'll have to transfer money to a Roth account almost constantly throughout their retirement.

And when will they receive the benefit? Well, in this example, it would be in 2046.

And if we go back to the 22% tax bracket conversion I'm going to do, it's 2044.

That means it's just two years ago. As you can see, the methodology is such that all taxes are paid quite aggressively in the initial period.

And finally, at age 59 and 70, $247,000 in taxes have been paid, and we never pay any taxes after that.

However, if we compare this to the traditional strategy of not doing a Roth conversion, we're just now getting ready to start paying taxes, right?

We've already benefited from lower taxes for six or seven years.

Now we'll have to pay more taxes than before, right? So this is where the real fun begins. So, let's get back to the big picture. Let's look at this story.

We think this plan is great. However, to take advantage of it, we'll have to start paying taxes really aggressively.

And we don't actually break even until later in life, because you'll see here that the tax payment on the $247,000 doesn't actually happen until age 84 and 85.

So we're 85, and now we're starting to recover from the losses and move forward. So, on the one hand, we have a story that looks great.

• We will pay less tax
• We will have more income to spend.
• We will leave a great legacy.

The flip side is that we have to spend almost our entire lives generating that profit.

What will they do? I think it really depends on how they view the overall landscape. That's a big question, isn't it?

How do I view this whole situation?

It really boils down to two questions. And I think the answers he gave to these questions, and the answers you gave to both of these questions, will likely influence your perspective on this topic.

#1: How important is heritage?

Because if you leave a Roth account to the next generation, they'll get the benefit of tax-free growth for 10 years, and that's a huge advantage, right? So if inheritance is important to them, they might choose that.

#2: What is your opinion about the future of taxes?

Because given our national debt and current spending, most people believe the situation is clear: Taxes will have to be raised.

None of these software programs truly captures what will happen if taxes are increased. Currently, we have software that can provide some insight into this, though not as accurately as this software; importantly, the benefits are even better.

So if you're the kind of person who just wants to get rid of the government.

And I wrote another story about how money deposited into a Roth account isn't taxed in your Social Security account, so that could be a reason to deposit money into a Roth. So those are two questions.

How would you answer these two questions? Is a Roth conversion beneficial? Is it more important to you to avoid government taxes early in life? Does inheritance matter to you?

Let me know in the comments. I made another video about a family who saved $4,000 on their tax bill last year by doing one thing.

And that was the year he retired. This was a timely process he had to complete by December 31st of last year, but it can be repeated for you in the future.