One thing that is overlooked is a changing tax rate. If rates remain unchanged then you are absolutely correct. If the rates go up, after the conversion, then you are better off. Of course it is hard to predict rates, but based on the level of US debt, I don't think they will go down!

We have been contemplating this strategy for a while. Instead of the conversions, we are maxing out our 401ks now with Roth rather than traditional.

Excellent content from a basic standpoint. There are obviously a lot of other variables that factor into whether or not to do a Roth conversion, mostly in the form of surcharges (IRMAA), current income, stock market bull/bear status, and taxation in the years that one would decide to do a conversion. This video is excellent and informative, and you show the clear distinctions between scenarios. I think there will be a lot of people who will be pleasantly surprised that they don’t really need to do a Roth conversion after it was embedded in their heads to do so. I enjoy your channel!

Great Video!

Nice concise summary. I'll be sure to now go see your other videos on this topic. Would like to see if early death of one spouse (single file vs joint married) as a scenario to review side by side with the other break even scenario here.

Nice Video. You are the first video on Roth Conversions that I have heard anyone talk about time value of money.. 🎉

thank u for ur great and clear explanation…. now i have a better forsight of how to plan…

Great video. We've done Roth conversions in our 50's, in anticipation of using ACA from Ages 60-65. Withdrawing some $ from our Roth buckets during 60-65 will keep our "income" low enough to take advantage of ACA tax subsidies.

One benefit of doing it now is taking advantage of the lower tax rates that will automatically increase in 2026. If you are going to be in a higher tax bracket after retirement, it is better to do the conversation. My wife and I are currently in the 24% tax bracket and both of us are retiring in 2025. Because of annuities and SS, we will be in the same 24% tax bracket. In 2026, that bracket, alone with the 12%, and 22%, will be going to 28%, 25%, and 15% respectively. So, we have been moving money out of tax deferred to Roth using a portion of the tax deferred income to pay the taxes. Yes, we are sacrificing the income paid in taxes. However, that sacrifice is at a lower tax rate that the money will be at from 2026 forward.

No conversions for me. I'm using my small ROTH IRA as a secondary emergency fund. I'll draw down on my 401k when I retire while letting my 457b grow untouched until age 75. Drawing on my 401k will reduce my RMDs. We don't have kids so we're not worried about leaving a financial legacy.

I am 64 so have 11 years before RMDs kick in. My plan is to eliminate all income other than SS and RMDs and take advantage of the annual inflation adjustments to the standard deduction and tax brackets. That will allow a portion of my income will be taxed at zero and low tax rates so the “average” rate will be lower than the “marginal” rate that I would pay today if converting to Roth.

Regarding #3...I retired in late 2022 (single, aged 59.25 years, 2 heirs). Since then, I've watched way too many retirement videos (mostly regarding Roth conversions). While many mention Roth is very advantageous for heirs, this is the first I've seen to mention the brutal statistics (most will go to heirs). Leaving a large inheritance is not a priority for me, however I am doing substantial conversions because 1) I have only pre-tax 2) taxes have nowhere to go but up and 3) to minimize RMDs (if our government doesn't implode first and I live to 75).

4:23 "Mistake 2" is a phantom mistake as it's really not inherently advantageous 8:00 to use "cash account" to pay for Roth conversion since using either method to pay for conversion results in identical spendable income. The $13,039.20 post tax cash used in Scenario 2 to pay for conversion is equivalent to ($13,039.20 / 0.85 =) $15,340.24 pretax income in traditional account used to pay for the conversion in Scenario 1.

Another reason to do Roth conversion may be intangible for oneself and maybe only tangible for the heirs. I can afford the conversion, and I look at it as purchasing future simplicity. If my tax bracket goes up (as I believe likely) then I'll win financially as well as via increased simplicity.

Thanks, Peak Financial Planning; knowing the traps to avoid is the difference between an amateur and a pro tennis player; the pro makes few unforced errors, whereas the amateur does.

Thanks Eric for another informative video. You explained the differences very clear and easy to understand examples. I'm sure that you didn't include the potential IRMAA surcharges to keep the examples simple.

If your plan for long-term care is to self insure, then you would want to pay those expenses with pre-tax money. So over converting to Roth would not be optimal.

I plan on living on my SS and pre tax IRA. I don’t mind paying the tax as I withdraw as income is needed. No conversions.

To decide if I should or shouldn't do the Roth conversion. There's several different things that need to be taken in to consider. Some people are saying pay for it doesn't matter the tax level. You have to weigh everything before you decide. It's not for everyone.

With regards to taking money out, you are paying the taxes one way or another - whether from your IRA or from a cash account. I think the most interesting point is the time value of money. And the most agonizing at the same time.

What if my converted roth funds are generating a 10 to 15% annual dividend? My returns cover the tax costs of the converted amount within a 2 year time frame. Am I missing something here?

I have 1.2 million. I am converting most in my 50's and early 60's but leaving a bit in the pre-tax 401k/ira such that the RMD's won't push us to the next bracket, and will also allow potential tax free LTC deductions from the pre-tax accounts in later years.

Yes, I am saving up for Roth Conversions by putting 100% of my 401K contribution into employer plan Roth, but I am paying more taxes as I am in high income bracket, lol...I think income tax rates will just get higher and higher and higher! I am so tired of financial planners saying we will have a lower tax rate in retirement. They also do not consider taxes of surviving spouses.

You need to update the model every year. Nothing stays the same year to year, and that should include your plan changing year to year to match the new situation.

If you have significant money in 401k/TradIRA, then RMD's will kick your butt and potentially move you to a higher bracket. Do the conversions to Roth, and pay the tax with non-ira money preferably, but even if you have to pay the tax with ira money, that is better now than later. You are paying that tax no matter what, but pick the best time to pay that tax.

Modeling Roth conversions assuming the rax rates go back up I only show not converting only costs me 5 % over the next 30 years. I plan on not converting to Roth.

One thing that seems to be missing is married filing jointly vs single filing. If not being strategic about that "heir" you end up making them pay more in taxes before they pass it on to their heirs. Don't forget the single spouse possibility

You don't seem to differentiate between the actual value of a dollar in a traditional IRA and the actual value of a dollar in a ROTH IRA. You, or your heirs, will eventually pay the tax owed on a traditional IRA (unless donated to charity). If you ultimately pay that tax at a 15% rate (including dealing with the percentage of social security you pay taxes on, IRMAA, an other side issues), the value of a dollar in a traditional account is only 85 cents whereas the value of a dollar in a ROTH IRA is a dollar. In the traditional IRA, you have a partner (the government) who owns part of the assets held by the IRA. The actual value of a dollar outside a retirement account depends on the cost basis, as you will owe taxes on the growth, if any.

I understand some will convert too much or too quickly to Roth. Others will convert too little or too slowly. None of us can predict future investment returns, tax rules, when we will die, etc. That said, this video didn’t help at all. Roth conversions are all about managing tax brackets and tax laws such as how income levels impact other tax rules like how SS is taxed, ACA tax credits, IRMAA,…. I totally disagree with the premise that Roth conversions will mostly benefit heirs. That sure isn’t the case in my financial plan.

I just turned 41 and awfully late to investing with barely any portfolio except my 401k, I have a decent amount of cash saved up and with inflation currently soaring AGAIN, I’m getting worried about retirement, my intention is to retire at 65 atleast, so how best do I maximize my savings of over $500k

Good content. But now I pay RMD taxes. And they seriously suck.

Where is RMD?

The elephant in the room is what happens if your spouse dies early. Then you are stuck with RMDs that don't have the benefit of a married couple (unless you get married again).

Luckily, my spouse and I were able to pay off our mortgage early. We took the money we were spending to accelerate our mortgage repayment and invested it right away while we were both still working. We were able to retire early after accumulating what would have been our home payment for over 7 years and maxing out our 401K/403B plans. Thankfully, both of our parents taught in us the importance of living within our means

My husband and I were fortunate enough to be able to pay off our mortgage early. We were both still working, and took the payment amount that we had been using to pay off our mortgage faster and we put it straight into investments. We were able to retire early because of almost 7 years of putting away what would have been our mortgage payment as well as maxing out our 401K/403B plans. Thankfully we were taught by both of our parents the value of living within our means. Thank you for your advice. I know it will help people. we are interested in investments that could set me up for retirement , I mean I've heard of people that netted hundreds of thousands during these crash, I listened to someone on a podcast who earned over $650K in less than a year, what's the strategy behind such returns?