I’m 65 Years Old With $1.4 Million In IRA’s – Should I Do A Roth Conversion?

In this video, we’re going to look at someone who’s 65 with $1.4 million in retirement accounts. So this could be your IRA or your 401k. And we’re going to look at the impact that doing Roth conversions versus not doing Roth conversions has on. And also the taxes that are paid annually. And over the course of time, we’re also going to look at a little bit of social security to see it, taking it at different times, how that impacts everything else.

Because if you’ve watched these videos, you know, that every decision we make in retirement is like a domino. Everything is interrelated. When we take social security, do we do conversions? How much income? All of this impacts our balances, how long they’re expected to last, how much tax we pay. So we’re going to dig into it in this video.

hi, I’m Troy sharp CEO of Oak harvest financial group, host to the retirement income. Certified financial planner, professional and certified tax specialist. So 65 years old. Now this is an example that can be customized. Of course, if you’re 62 with 800,000 or 67 with 2 million or 62 with, with 500,000, it doesn’t matter.

I just want to show you the impact that. Roth conversions can have on your retirement versus not doing Roth conversions. And one thing I like to tell people is that whenever we look at these analyses, they’re nothing more than a snapshot in time. Things are going to change. Your preferences are going to change.

As far as your goals, maybe your objectives, the tax environment is going to change. The economy is going to change. Markets are going to be. That means the timing of when we do these Roth conversions is very, very important. For example, last year, when COVID hit, we did probably close to $10 million, maybe more in Roth conversions for clients.

Now, why do we do it when COVID hit? Well, when the market is down, that’s the ideal opportunity to take those. Put them over into the Roth IRA because you pay income tax on the value of the securities at the time of conversion. So when the market is down, when we moved all those assets over to the tax-free Roth IRA, when they grew back, they grew back 100%.

Tax-free very, very good strategy. Something that is going to make a lot of money for a lot of people. Now getting back to how all these things are interrelated. When you do these Roth conversions or how much you do all of this ties into what your future looks like. As far as how much security you have, how much income you have at how much tax you’ll pay, not just in a given year, but over the course of retirement, because that’s my concern.

Of course, I would like you to pay less tax today, but a lot of times we have to pay more tax today in order to pay less tax over the course of the next 20, 25, 30 years. So again, we have. Uh, 65 year old. And this is an example where. He is 65. His wife is a little bit older. She is already on social security and he doesn’t know whether he wants to take social security or not, but he has 1.4 million in retirement accounts, another couple of hundred thousand dollars outside of retirement accounts.

And the question. Troy, should I do conversions? Does this benefit me? And how much should I do? A lot of times when people come in for the first time or have a conversation they’re trying to target maybe the 10% bracket or the 12% bracket. And what that does is that kind of boxes in to, to this view of today, we’re looking at this year only, I don’t want to spend more than this on taxes.

So I’m going to go up to this bracket, but what we’re not doing is we’re looking out over the next 2030. What is the impact of doing that versus doing more? What does that have on my retirement? The impact that it has. So we’re gonna look at this. Okay. So this is, we’re going to look at, I could look at 22, 24 32.

I could look at various tax brackets. We can customize scenarios, but right here, we’re gonna look at going up to the 24% tax bracket. Now, one limitation with any software out there is we can only have. Within the environment that we are currently in, meaning right now, the Trump tax cuts legally are in place and they will be in place for the next five years now, you and I know that the tax law is about to change.

We don’t know what aspects of the law will necessarily be. Until Congress gets together and they actually bring a bill to the floor and they vote on it. And it’s something that gets passed. We have some ideas of proposals that are being, um, bandied about, but we don’t know exactly what the new laws will be.

And while I’m on this topic, it’s not just the income taxes that are important. It’s what other taxes could they add in, for example, Irma taxes. I R M a, this did not exist for these. You know, several years back, that stands for income-related monthly adjustment amount. It’s a hidden Medicare tax. That was something that has been recently added net investment income tax, a 3.8% surcharge.

If you make a certain level of income that goes onto your investment income. So these are things that aren’t necessarily income taxes, but through pieces of legislation that Congress has passed over the years, they’ve slid them in there. And if you make more than a certain amount of money, You are now subject to these taxes.

So I know they’re talking about not raising income taxes for anyone who makes less than a million dollars. That’s not my concern. My concern is what else are they going to slide in? But then also what will taxes be in four years, eight years, 12 16, 20, 24, 28 way into the future. Every new administration.

This is something that we have to be concerned with. So the limitation here is this software assumes. Only the law that we know taxes are what they are today. The Trump tax cuts will be in place through 2025. And then under current law, they revert back to how they were under president Obama. So with that said, doing Roth conversions up to the 24% bracket here versus what we call the more conventional wisdom strategy.

So what is conventional wisdom? Conventional wisdom is what for decades in this country, your Fidelity’s your Merrill’s your swab. Uh, ed Jones, your mirror prize. This is the income distribution strategy that for decades has been recommended to you. Okay. And in most of these firms, this is still the strategy that they’re employing.

Now for years, these firms have been telling you to do it this way, and we’ve been telling clients, no, we need to do it this way. And I’m going to show you why. So a couple of things we want to look at ending value of the portfolio. Now. All variables. Here are the same. As far as growth of the portfolio, how much income is coming out?

Life expectancy. These are important variables. They’re all the same. What we’re doing is we’re isolating only the distribution strategy. How much money do we convert or not? And from which accounts do we take income from? So this is assuming a more conventional wisdom approach. Conventional wisdom is you take money from your non IRAs, let your retirement accounts defer until you need income or you hit required minimum distribution age, and then you start taking your money from your IRAs.

In my opinion, from my experience, that’s almost, I’d say about 85% of the time, the exact wrong way. So, again, I’m speaking from experience here, working with thousands of clients over many, many, many years, and doing this type of tax analysis and income analysis and doing planning for our clients ending value is huge.

1.4 million doing the Roth conversion. 589,000, not doing the Roth conversions taxes paid 295,000 over the course of retirement versus 625,000. Over the course of retirement. Now the social security strategy is a little bit different here too, because I wanted to show what happens with a different social security decision.

Um, it’s not drastic, it’s not a big change, but it is something that I should should point out. The social security is a little bit different strategy here for this case versus. Again, this is more conventional wisdom, what we would see from most of the firms out there. Okay. So first thing I want to point out is the downside to doing Roth conversions.

When we do a Roth conversion, we have to take money out of our accounts. We write a check to the IRS and we send them that money. Well, when we send them that money, that’s less than we have in our accounts to earn interest on and to compound over many, many years. So that is a downside to doing. You’ll see the positive in a minute.

Now it’s not my job to tell you to do a Roth conversion or not do a Roth conversion, our tax team, our financial planning team. We see ourselves as the CFO of your family’s finances. You make the decisions. You’re the CEO, you’re the executive you and your. You guys decide what is in your family’s best interest, but our team, our experience, our skill, our, our research capabilities and our ability to analyze all these moving parts within a retirement plan to help you make the best decision.

That’s our job. So here’s the downside. So the green line is we see here is not doing any Roth conversions. This is the more conventional, conventional wisdom strategy. The blue line. This is the Roth conversion strategy. So we see that. Okay. The accounts are dipping because we’re writing those checks and we’re sending them to uncle Sam.

Over time. Once we were done with the conversions, the accounts start to grow back and we see the crossover point for this particular example right here. It’s right around, about 84 years old. Now something to keep in mind about the crossover point, just because this green line is higher. Keep in mind that this is tax infested dollars.

Okay. These, if you needed to access that money, you can’t just go in there and take it all out. If you took it all out, you’re going to pay a much larger tax percentage because you’ve distributed. From a retirement account. So even though your balances are higher, which does mean when you earn 10% interest, you earn more interest.

Okay. But it doesn’t mean that it’s necessarily all of yours. If you need to act. So here’s the crossover point. And then what happens over time is because we’re paying more taxes later in life because we haven’t done anything about this tax infested retirement account. We’re having to pull more money out.

We have larger required minimum distributions, potentially. We’re getting bumped into higher Medicare brackets and. When we compare it to the Roth IRA. Well, we’ve bit the bullet up front. We’ve paid some taxes. We’ve eliminated that part from the retirement account. Now we can just compound and grow.

Tax-free we’re going to get into, to a deeper breakdown in a minute, but obviously we see the downside to doing the Roth conversion upfront, but long-term we see the benefit and this is just from an account value standpoint. Okay. Okay. Big one here. This is, this is important. First off required minimum distributions.

For those that are unaware under current law of 72, you are forced to start distributing money from your retirement account. Uh, side note here, there is a pending piece of legislation it’s called the secure act two, and it’s almost certain to pass this year. There is wide bipartisan support. Believe it or not, Republicans Democrats actually agree on something.

Uh, they passed a similar piece of legislation back at the end of 2019. So this is part two of that act and they are going to increase the age when RMD stark to 75. This is it’s not an absolute certainty. Pretty likely. So again, the software its limitations, we can only operate under the law as we know it today.

So required minimum distribution start, the green is simply showing what our RMDs are. If we do not do any Roth conversions, if we follow the conventional wisdom, a piece of advice, which is defer your IRAs as long as possible, and then take out only what you need. Required minimum distributions here.

Again, this is looking at about a five and a half percent growth rate, or so both scenarios start out around 72. Well, we have two different IRAs here in this, in this case, the wife has an IRA. The husband has an IRA, but combined, once we get out here, this is where I want to isolate because obviously we see a big disparity here.

72 75, 90,098,000 a hundred thousand. So it’s estimated they’re going to have a required minimum distribution of a hundred thousand at about age 82 or 83. Now that a hundred thousand dollars of income that we’re forced to distribute from the account goes on top of our social security. If you have rental income, maybe you have annuity income, maybe you have dividends and interest from a non IRA account.

All of that income goes on top. So now you’re looking at. Taxes at a higher bracket, possibly on this distribution compared to the blue, we have much smaller, much more controllable required, minimum distributions. Again, we’ve simply paid those taxes up. We’ve gotten the tax man out of our pocket, and now we don’t have to distribute the money if we don’t need it.

And instead it gets to stay in our account and compound tax-free for the rest of your life. And then 10 years. Beyond your death, the death of the last spouse for your children, total taxes paid. Now here is, you know, the downside. We have to write these checks. If we’re going to do these conversions in this scenario, taxes here for this going for this family, going up to the 24% bracket.

We’re writing checks 67,000 for four years. The first years checks is always the hardest, right? Plain and simple. Once you write that first years check, and if you do it at the right time, like I said earlier, like we did for our clients last year during Corona market’s down. That’s when we want to do those conversions because we’re converting dollars that have depreciated in value, we’re paying less income tax and we’re moving it over to the Roth.

So when it grows back, it grows back tax-free now that’s the strategy. That’s the goal. It doesn’t always happen exactly like that. Of course. But we were pretty confident with, with that move for clients last year. And we do it. That’s what we do every year for clients. So total taxes, we pay those taxes and then we have a very clear visual from, from a bar chart perspective here of what taxes look like moving forward.

So I personally let preferred ledgers over charts because I like to see the detail of the numbers. Okay. So first thing I want to kind of point out. We’re going to look at the Roth 24, paying the taxes. We see the 67,004 years, and then look at what we’re paying from that point forward. So out here, once we get converted, I’m going to come back to the social security in a second.

But once we get through here, we pay the tax. We have $54,000 in social security. They’re taking this couple spending about $75,000 a year, total. So they’re taking more money from the, from the assets taxes are only about $36. That’s it look over the next, let’s call it twenty five thirty years if completely eliminated the tax man from their pocket.

Now here’s the other one. We could actually pay very few taxes in this retirement scenario over the next few. But why do we want to pay less taxes in a time when taxes are lower than they’ve ever been for you in your lifetime? It doesn’t make a lot of sense. Why are we just deferring that until down the road?

Now everyone’s different and you have to make this decision yourself. But my opinion is, look, we’re not getting, we’re not avoiding. These taxes by not doing the Roth conversion, we’re simply kicking the can down the road. We’re simply deferring the timeframe that we will pay these taxes and by doing it now we know what the tax rate is.

We can control how much we just distribute. We’re not forced to distribute an amount that is 70, 80, 90, a hundred thousand. We can be flexible. We can do it over a period of years. And we know what the tax rate is. I have no clue what the tax rate is going to be in these out years. But if we look at. The base strategy, the more conventional wisdom approach.

This just assumes that again, taxes are what we know taxes will be under current law. And in these out years, this is the same tax environment. It was prior to the Trump Trump tax cuts. So back under president Obama. So taxes very well could be much higher in these out years, but regardless of what the tax environment is.

It’s very clear in the future. We’re paying a significant amount of more taxes, 20,000 versus 723 versus 930 versus 14. Okay. And the total tax savings estimated over time is about $330,000, 295 versus 600. And twenty-five grand a couple of things to note here first and foremost, these are all estimates.

Okay. Taxes will change. I believe taxes are going to go up. If taxes do go up for you at some time over the next 30 years, the disparity between these numbers is likely to be greater. Now, number two, thing to note is this is nothing more than a snapshot in. What’s most important is that you have these types of conversations.

You have these types of analyses run every few months. We do it every six months for clients. That’s when we do our reviews with people, um, things just don’t change typically, uh, quarterly. So it doesn’t make as much sense to do this type of analysis every three months. But you want to be doing it a couple of times a year, uh, one time a year at the very minimum.

So things will change. Your objectives may change. Um, what we want to do is make sure we’re staying on top of this because as things adjust over time, we may want to pivot our strategy, do more, do less. Um, let’s say we think taxes are going to go down in the future. Well, maybe we want to stop doing those conversions and maybe we want to pick them up in a couple of years.

So many things can change. Now. One more, very important thing is the composition of your accounts. Okay. What do I mean? Well, the composition is how much is tax-free. How much is tax deferred and what is your non-qualified or let’s say your, your brokerage account or your, your joint accounts. So we call it non-qualified meaning your IRA dollars, your tax deferred.

Those are qualified. You have your Roth, which is tax-free. Then you have your taxable accounts. These are accounts that you’ve saved outside of your retirement account, that as you earn interest or sell stock or have dividends, you have to pay tax annually on those accounts. Now that’s what the composition means.

In this particular example, this family starts out with. It’s about 1.3, one five about one, almost 1.4 in tax deferred accounts and a couple of hundred thousand here in, well, this is actually the first conversion. So regardless we see over time that the accounts are becoming tax-free when they pass away.

If it’s here, here, here, here, here, anywhere in. If it’s important to you to pass money on to the children in, or at least keep the money in your family and not have the government take large portions of it, it’s much better to pass tax free money on than to pass tax infested money on. Cause here’s why in this particular example, yes, we do have a lot less, but all of this money that is being passed.

It’s force distribution for the children when they receive it. So let’s say you have a daughter and she’s working and she’s married and he’s working. They have combined income of $150,000 a year. Now. They, they, you pass away here. They inherit $1.3 million, all tax. They have to start taking that money out.

They take that money out, that distribution, all of that income goes on top of their income. Now, what tax bracket do you think there’ll be in now? 200, 300, $400,000 of income. Let’s say they take it out all at once and they want to buy a house. What are the tax rates in 15, 20, 25 years. Uh, and so keep in mind these Roth conversions, yes.

The analysis of how they can benefit you and provide value during your retirement is very important. But if the legacy component is important to you as well, this is something that needs to be taken into consideration. We all have different objectives. We all have different goals. So should we do Roth conversions?

That’s up to you. It’s not my job to tell you whether you should do a Roth conversion or not. But I do want to get the point across is that for many of you, there can be a tremendous savings during your life, and also add advantages to passing the money onto your children or grandkids. Whatever your goals may be.

If you liked this video, make sure to hit that thumbs up button, hit the subscribe button. This way you can be connected to us when we upload more content and comment below. Let me know what you think. Have you done conversions? Are you considering doing conversions? Are you scared to pay those taxes or, Hey, maybe it’s no big deal to pay those taxes either way.

Let me know in the comments and we look forward to seeing you on the next video. .