Impact of Portfolio Return on Your Roth Conversion Strategy (Surprising)

Рет қаралды 18,664

Күн бұрын

Are you uncertain if your Roth Conversion strategy is best for your retirement? What happens if your portfolio return is 1-2% higher or lower than you expected? Is your current strategy still optimal? You can schedule an appointment with one of our Retirement Experts to look at your situation and help you plan for your future. Call us at (920) 544-0576 or go to www.safeguardinvest.com/contact.
Timestamps:
0:00 How Much Does Growth Rate Affect Roth Conversions?
0:13 The Main Catalyst For Roth Conversions
1:19 Why You Will Have an Increasing RMD...
2:30 The Wide Dispersion of Portfolio Returns
4:02 Case Study: Benchmark Example
6:17 RMD Growth in a "Normal" Environment
7:57 RMD Growth in Higher/Lower Return Environments
8:40 Optimal Roth Conversion Strategy Based on Growth Rate
11:19 Additional Context: Does Portfolio Return Matter?
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Пікірлер: 35

@randolphh8005 17 күн бұрын

Great video! Your last chart brings up the most important point for those already retired. Over converting causes you to lose money! Under converting cause you to pay more tax. What many forget, is that with average portfolios, relying on an high annual ROR to come out ahead increases the risk of a conversion, which of course is done early. That causes your portfolio value to drop, in a poor return environment that would mean less gains over the subsequent years. The person that didn’t convert as much will have more gains that maythen be taxed at a lower rate than if they had been aggressive with the conversion. For large portfolios with excess funds, this risk is not as consequential. On the flip side if I have a just large enough portfolio, that ends up with a very good ROR, then yes I pay more in taxes, but I also have more money to pay them, so it won’t impact my cash flow. Cash flow always needs to be the first consideration, ultimate total taxes paid should be the second consideration.

@ralphparker 6 күн бұрын

Did you talk about the advantage of Roth in that you can manage which bracket you max out. For instance, Say I need to max out the 12% bracket just for normal living expenses. But a need for a new roof comes up and if I pulled that money from the regular account cap gain gets thrown into the 15% bracket for from the regular IRA, which gets taxed at 22%. But then having funds in a Roth, I can withdraw that and not have any additional tax consequences. And this was incrementally funded thru optimum Roth conversions for that 5 to 10 Year period when my tax rates were lower.

@BillMaass 17 күн бұрын

If I am the client shown, I will opt to fill the 24% bracket in 2024-2025. Annual reassessment might convince me to only fill the 15% bracket in 2026-2028 if TCJA sunsets. Since investment returns will inevitably fluctuate, one needs to consider taking advantage of a down market if we see a repeat of some short term correction/crash that occurred in say 2008-2009, early 2020, or even 2022.

@BillMaass 17 күн бұрын

@@_-Karl-_ The example says they have $1.5 million in tax deferred. They aren’t collecting SS for another 5 years. Filling the 24% bracket means they can convert over $400k in both 2024 and 2025. Depending on their rate of return, that should drop them under $1.0 million by 2026. I stated that after annual reassessment I might drop down to the 15% bracket. This was a direct comparison to the example shown where the first five year target was 22% in the first two years and then 25% the next three. The current 24% bracket is much wider than the lower brackets. Do the math and you will see that I can convert much more using the 24% bracket and having the ability to drop to the 15% before collecting SS than converting thru the 22% and just about being forced to convert into the 25% those last 3 years before collecting SS. You will notice that Eric’s example shows him dropping conversions to the 15% bracket after 5 years. Being more aggressive by using the TCJA’s 24% bracket gives me the chance to scale back to 15% earlier if I want. Remember, 24% is less than 25%. I personally would sleep better filling those 24% brackets initially even if I am triggering IRMAA for one year with the 2025 conversion.

@keithmachado-pp6fv 9 күн бұрын

I like your videos. Everything else being equal, I am ok paying more tax if the reason is growth is higher than expected.

@slimdawgwoof 18 күн бұрын

You are the GOAT!!!! Another great one!

@jamesmorris913 16 күн бұрын

Your final point, is the most salient, to me; especially since I live in COMMIEfornia. I'm already in the 22% bracket, Federal, and 9.3% State..as a RETIREE, and I haven't even begun to to take 401K distributions, yet! The overwhelming majority of my retirement assets, are in traditional 401K, roughly 90%. It would be JUST MY LUCK..that I would spend a zillion dollars on roth-conversions..and then 1929 would happen, ALL OVER; AGAIN!

@montesarache5993 18 күн бұрын

In 2024 the ordinary income cap for the 22% bracket is $201,050 and for the 24% bracket is $383,900. Those advocating going into the next tax bracket when doing Roth conversions should keep in mind that once your adjusted gross income hits 250K you become subject to the Net Investment Income Tax (NIIT) which is another 3.8% of the portion of your income over the 250K or on long term capital gains, whichever is smaller. So it is not just going from 22% to 24% but could be from 22% to 27.8%, which is not insignificant. Not enough folk bring this up in videos ( a pet peeve) and so this is just a friendly reminder. Overall, it was great to see that our strategy meshes well with Safeguard's. Nice video! Thank you!

@johnboyle7376 18 күн бұрын

Very good point. To clarify, the $250k is for people filing MFJ. It’s $200k for single filers.

@anujgupta9293 18 күн бұрын

The other thing they never talk is, your state income tax and city tax . Let's say at present your state tax is 8 percent , but in retirement, u move to no state income tax state . That will make conversion less useful

@PH-md8xp 18 күн бұрын

Lots of gotchas to watch out for in retirement.

@Random-ld6wg 17 күн бұрын

that is the exact situation i am in. i live on and pay taxes out of my taxable brokerage in early retirement so even getting the money to pay for the conversions also generates capital gains. for 2023 i converted 195K and with my MAGI at 286K. the 36K of capital gains had an extra $1368 of taxes. If i converted up to 24% bracket above 250K, all my capital gains will have the extra 3.8% NIIT. this also pushes more of my actual living expenses from my capital gains into our states top 5.9% bracket although we do get a 40% deduction on LTCGs but not on dividends. my solution for now is to tap the investments with less gains vs the multibaggers if i get tempted to go up 24% for the remainder of '24 and for '25. that jump from 22% to 25% and 24% to 28% as the trump tax cuts most likely expire in 2026 is tempting me to go up to the 24%. your portion of conversions above 250K though is considered income and not capital gains so any conversion above 250K IS NOT subject to the NIIT. correct me if i am wrong as that is what i infer from your " doing Roth conversions should keep in mind that once your adjusted gross income hits 250K you become subject to the Net Investment Income Tax (NIIT) which is another 3.8% of the portion of your income over the 250K OR on long term capital gains"

@montesarache5993 17 күн бұрын

@@Random-ld6wg, Thank you for your thoughtful analysis and for sharing a real-life experience. We are not a CPA nor a fiduciary so would never advise anyone other than to suggest that they speak with a professional. Your sharing your experience is very valuable and is much appreciated. The IRS code IRC Section 1411(c)(5) agrees what you have written. Our somewhat poorly worded point was that going over 250K will trigger the NIIT and this part is often omitted. We should have been clearer on that. Thank you!

@lukemaxon 18 күн бұрын

Excellent video - Thank you!

@paulsackles1329 18 күн бұрын

Great work Eric. Your clearly passionate about this topic and with that brings so much clarity to the table; it’s complex for sure.

@PH-md8xp 18 күн бұрын

Great analysis and discussion.

@Paul-GrnHil 18 күн бұрын

First let me start by saying Roth conversions early in retirement while living off taxable accounts and before collecting social security is an absolute priority. As for the remaining IRA or rollover 401k accounts, they are going to be taxed no matter what, the only question is when. Whether an RMD or a voluntary Roth conversion, the taxes are the same. I do not consider RMDs to be a tax problem if you consider the tax liability holistically. If your retirement accounts are generating RMDs in excess of your living need then you should be thinking about estate planning rather than just retirement income. The taxes you pay today at your retiree rate are likely to be less than the rate your heirs are going to pay when they have to distribute the inherited IRA during what is likely are their highest employment income years. BTW, if you have the “problem” that your RMD requires you to recognize income you don’t need for daily living, you can always fund your grandkid’s 529 accounts and avoid taxes on the account growth and even have the opportunity to convert the unused portion of their 529 for their starter Roth account.

@ld5714 18 күн бұрын

Another great discussion on this important topic Eric. Thank you for this excellent video. Larry, Central Valley, Ca.

@danms1232 18 күн бұрын

How should a person account for state income tax? Does the 22% federal tax bracket still make make sense or should that be lowered by the amount of state tax?

@danms1232 16 күн бұрын

Thank you. I live in Minnesota.

@paulbeaumont2714 18 күн бұрын

What is the tax impact for paying back Social Security for overpayment? Do you need to file an addendum on last year’s taxes or dues this impact this year’s taxes?

@OffgridApartment 18 күн бұрын

All this gets extra interesting if you plan to exit the w2 at or around 40. Converting enough early to keep your deferred accounts from growing over 35 years to be hit with RMDs is a big consideration IMO, but also, you can be very selective in choosing how much and when to convert. Pairing tax loss harvesting and conversions in the same year as a big draw down creates benefits on benefits later on. If nothing else you get to exclude $3000 more in income every year on top of standard deductions which should hopefully keep you out of super hot water long term.

@mere_cat 18 күн бұрын

Hooo! You look like you got some sun. Hot over there in Wisconsin?!?

@SafeguardWealthManagement 14 күн бұрын

Getting there... Been a rainy summer thus far!

@PH-dm8ew 18 күн бұрын

One fact that never gets discussed is the step up value of stocks in the brokerage account for beneficiaries. So reinvesting those RMD's help the beneficiaries in the end, if you cannot convert those funds to a ROTH, all is not lost.

@Paul-GrnHil 18 күн бұрын

I totally agree. I hope to leave 529s to my grandkids, Roths to my heirs and hopefully little left in my IRAs. RMDs are the least of my concerns.

@Random-ld6wg 18 күн бұрын

he wasn't recommending converting everything just enough to keep rmds manageable. the 500k left after conversion will still be subject to rmds but hopefully be manageable. the way i look at it is if after mitigating the rmd tax hit with conversions yrs before and you still end up with substantial rmds, then just count yourself lucky that your portfolio grew even more and pay the tax,.

@jerrylabat550 18 күн бұрын

It fascinates me that you fixate on filling tax brackets. Since tax rates are progressive you should fixate on effective tax rate, so in your example where you declared 3 of the return rates should fill the 22% bracket you would have seen significant tax savings by optimizing to a flat effective tax rate over their lifetime (I.E. one of them might have optimized to 14%, another 17%, and another to 20%). None of these optimizations would have exactly filled a tax bracket.

@BillMaass 17 күн бұрын

Tax planners fixate on what matters like marginal tax brackets along with other special rules such as taxation of SS, LTCG/Qualified Dividends, IRMAA, etc. Calculating an effective tax rate is totally irrelevant to tax planners. You should watch Safeguard’s excellent video of 3 weeks ago showing useful tax planning graphs contrasted to the useless graph of effective tax rates.

@jerrylabat550 17 күн бұрын

@@BillMaass I hope you realize that if you are talking about filling the 22% tax bracket, you have conceded you are taxing SS at 85%, capital gains are at 15%. All of your special considerations are wiped out except the discussion on IRMAA. Which brings my point into focus, if someone has enough tax deferred income to consider filling the 22% bracket they should focus entirely on minimizing their effective tax rate across their lifetme. So planners should have laser focus on this versus marginal tax brackets once you move past filling the 12/15% brackets. This becomes particularly important when one spouse passes, and the real tax torpedo hits when they switch to single tax rates.

@BillMaass 17 күн бұрын

@@jerrylabat550 Not at all. Roth Conversions are best performed in tax years prior to claiming SS. As for LTCG, most taxpayers don’t have a taxable account with significant unrealized gains. If they do, then they can time the Roth Conversion to be smaller in a year they recognize a large gain. Proper planning takes all of those tax rules into account. An effective tax rate is simply a ratio of total taxes paid to total income and is calculated after the fact.

@jerrylabat550 17 күн бұрын

@@BillMaass Look at the difference between planning for $1M and $2M - at $1M you could convert filling 12/15% prior to taking SS, and then do the rest with RMDs. That will still have a fairly big tax hit when one spouse dies, but we don't know our expiration dates ahead of time. Now switch to $2M, if you don't go over the 12/15% bracket you likely don't even reduce the principal. So it makes sense to start focusing on effective tax rate so that you get away from having an effective tax rate of about 10% on $100K so that you can have the privileged of paying an effective tax rate of 25%+ on $250K as a single. If you targeted taking $150-$175K total per year (including RMDs) for the rest of your life you likely have a 15-18% effective tax rate which could easily save $250-500k in taxes over 30 years. Obviously you have to adjust based on market conditions, tax law changes, etc. but when you look at the lifetime tax savings by optimizing the effective tax rate to a flat line you get to the point I was trying to make.

@BillMaass 17 күн бұрын

@@jerrylabat550 My point is that good tax planners don’t bother calculating an effective tax rate. It is meaningless. Beyond that, you seem to assume that tax rules won’t change in the future and both spouses will die at about the same time. I don’t want to take that risk. In this example, I recommend converting into the 22-24% brackets while taxes are on sale. I refuse to kick the can down the road by paying less in taxes now and leaving a surviving spouse or heirs with a larger tax liability in the future.