Roth Conversion Ladder: How Marital Status, Tax Bracket & Stock Market Affect Outcomes in Retirement

I received an email from our video marketing team that said, “Troy, the Roth Conversion Ladder video has 25,000 views in just the first 24 hours.” The actual title is, I’m 60 with $1.5 Million for Retirement: How a Roth Conversion Ladder Can Potentially Save Up to $600k in Taxes. In addition to all the views, we’re up to 73,000 now in just the first four days. I really, really appreciate all the comments because it shows that you’re watching the videos, you’re thinking about them, and hopefully, you’re able to apply some of the strategy to your personal retirement and that’s why we do this channel. I want to take a moment out of my day to respond to your comments and questions and encourage you to continue the conversation.

For those of you who may not have watched the video yet and are seeing this for the first time, if you go to the Oak Harvest YouTube channel, click on videos, it’s right here. It’s the one with me climbing the Roth Conversion Ladder with the golden egg here. Just simply click on it. The video comes up. We’re going to pause that and go down here to the comments.

With the numerous bank failures as of late, am I better off reinvesting my retirement savings in the stock market or do I wait?

The first comment comes from Seehame127. Apologize if I mispronounced it, but she says, “I’m a single mom currently retired, and considering the current roller-coaster nature of the stock market, I decided to stay on the sideline for a while. Now I’m worried with the numerous bank failures as of late. Am I better off reinvesting my savings in the stock market or do I wait?” There are nine different replies to this comment. That’s why I wanted to address it, because obviously, it’s something very important, but it gets to some of the very fundamental concepts of financial planning, especially when it comes to retirement.

If you look at some of these comments down here, Warner says, “I’m scared, but also excited to add to my positions as the market drops,” which is a very good way to look at this. Osterhagen says, “I’m hoping to end the rat race by 50, going 80% equities, 20% cash.” Again, plans to reinvest or invest more when the market drops. You continue down the comments, you can go to the channel and read these here.

A couple of points, and then I want to tie it back to the Roth conversion ladder. Okay, first things first, we never want to allow our emotions to dictate our behavior when it comes to investing. Concern about the roller coaster of the stock market. Well, the truth is the stock market is a roller coaster. That’s not going away anytime soon. As we read through the comments here, it talks about some of the volatility but I wanted to pull this chart up. It’s known as the VIX, and it tells us what volatility has been over any time period that we enter.

I actually input the five-year chart here and we see volatility is actually darn near at a five-year low. Now, that means stocks are at an all-time high nearly because stocks and volatility were inverse to one another. First and foremost, when we feel that the market’s volatile, it’s typically because we’re watching the news or the news media, and they traffic in selling fear and greed. That leads us as humans to our emotions, to dictate our behavior, and it really changes how we view the actual stock markets. The truth of the matter is, when we look at it from a mathematical perspective, volatility is at an extremely low point when compared to the past five years.

We see this big spike right here. That’s the crash in March of 2020 from COVID. We see over the past five years, volatility has been at a much higher level, but very clearly, it’s been trending down for the past, let’s call it a year and a half. A couple of quick points here. Different approaches if you’re in retirement versus in the accumulation phase. Either approach, though, it would not be a bad idea to dollar cost average. That means taking an equal portion and investing it over a periodic period of time. Maybe $10,000 a month for the next ten months to get $100,000 in. Not a bad approach if you’re in retirement or in the accumulation phase.

If you’re in retirement, the consequences are so much more dire if you make the bad decision, so what you really need is a plan. You need to see how much income your assets can generate with respect to inflation and taxes over time. Now, we call this the Retirement Success Plan. All that really does, the RSP, is create visibility into the impact your decisions are having today on your future security. You need to create that visibility and then step one of the RSP is understanding what an appropriate allocation is.

Now, by doing this, the impact of specific allocations. 60 stocks, 40% bonds, 80/20, 20% stocks, 80% bonds. How all those different allocations could potentially provide an expected rate of return. Then as you’re taking money out over the next 20, 25 years, you can get a range of possible outcomes based on all of the best-known assumptions that we can make. You need visibility to help make these types of decisions.

Tying it back to the Roth conversion ladder here, all of these videos that I do about tax planning, they’re based on a snapshot in time, given the circumstances that we actually know. Truth of the matter is, in six months, or one month, or 15 months, the market could take a pretty big correction. When it comes to our Roth conversion strategy, generally speaking, in market corrections, we have the opportunity to accelerate our Roth conversions because when those principal balances decrease, because the market drops, you can do a conversion.

Let’s say your account’s a million, it drops to $500,000. If you convert $100,000 when it was a million, that’s 10% of the account value. The opportunity that comes when the market goes down, converting that same $100,000, you’re going to pay the same amount of taxes. $100,000 is going to move over to the Roth. It’s now 20% of your retirement account balance. You’ve converted a larger percentage of your overall retirement account for the same cost as just a few months prior when the market was a lot higher. That’s an extreme example of a 50% drop, but it makes the math easy.

Hopefully, you understand that by being in the market, even when it goes down, there still is opportunity created. We have something new that is designed specifically for you who are concerned about market volatility, the market dropping. We’re going to wait until January, possibly early February to tell you about that but we’re very, very excited, and we think you will be too.

How does the Roth Conversion Ladder work for single people?

The next comment is from John Essency 9467. He says, “It would be interesting to see how this approach works for single people.” A couple of things here, John. The concepts are the same, whether you’re single or married. The difference is you don’t have two Social Security incomes, of course, but the tax brackets are different. To achieve the Roth conversion that targets the same tax bracket, you have less income room, meaning you can convert less or have less other income before you’re approaching those similar brackets as a married filing jointly couple. Second thing, we’ll actually do a video about this same concept for single people. That’ll come out in a few weeks, so stay tuned but we’re going to do a video to more specifically answer your question.

How does the conventional strategy drag you into increasing tax brackets, IIRMA thresholds and possibly NIIT (Net Investment Income Tax)?

Next comment comes from someone with the title of user with a whole bunch of numbers behind it. They say, “It would be helpful to also show how the conventional strategy, option B in the video, drags you into increasing tax brackets, IIRMA thresholds, and possibly NIIT, which is net investment income tax.” Okay, the general premise here is that your retirement account, for many of you, is a ticking tax time bomb. What that means is the more you let it grow, once you hit required minimum distribution age, the government mandates that you take out a pretty large percentage and that percentage is increasing as you progress through retirement.

What a lot of times happens when someone comes to see us and they’re already 75 and they say, Troy, I’ve been listening to you for 10 years, but I’m just now calling you because my RMD started and I have to distribute so much. My taxes went up and it really becomes too late to address the problem at that point, but that’s what we’re talking about here. When you necessarily don’t need all that income, you’re 75, 76, 77, 80, and the government is forcing you to distribute these large sums of money. You multiply that percentage by your ending account balance on December 31st of the previous year. That number is how much you must distribute.

You distribute it from your IRA. It’s fully taxable. At that point, you’ve turned Social Security on, which possibly too, if you’re married, Social Security checks, you may have dividends, you may have interest. By not doing the Roth conversion strategy leading up to that point, the Roth conversion ladder, then you possibly put yourself into a precarious position because you’re forced to distribute so much money that goes on top of all your other income. Then you’re crossing over into certain thresholds because of all that income where you may owe net investment income tax, you may owe an extra tax on your Medicare premiums.

Many of these things, keep in mind, net investment income tax, IRMA, they were non-existent about 12, 13, 14 years ago. They’ve been pieces of legislation that have added into the tax code, pieces of legislation that had carve-outs that impacted the tax code, I guess I should say, so we don’t know what else is going to come about over the next 5, 10, 15 years. For example, the Affordable Care Act, otherwise known as Obamacare, introduced the concept of net investment income tax. If your income levels exceed a certain amount, there’s a 3.8% surcharge added to all your investment income. Keep in mind that we don’t know what taxes may be in the future. Once you get into very, very high-income tax brackets, the government considers you to be wealthy enough to pay certain extra taxes. We want to avoid that. That is the purpose of converting to a Roth IRA.

What rate of return are you assuming for the investments? How would Roth Conversions be navigated if one was still employed?

Our next question comes from Brookliner. “What rate of return are you assuming for the investments? Also,” and maybe this is another video, “how would this be navigated if one was still employed? It seems Roth conversions work best when they aren’t stacked on top of other income.” A couple of good questions here. First one, pretty simple for a 60-40 portfolio, we use about a 5% average rate of return.

Now, we do this because we want to be conservative with the projections, but a lot of times what we’ll do is create a sensitivity analysis where what happens if the portfolio averages seven or what happens if it averages three. What we’ll also do is adjust the rate of return expectation based on your willingness to take risk. Meaning if we put together a 75-25 portfolio, we would expect that to have a higher rate of return of course than a 60-40 portfolio over time. We go into settings, we adjust the rate of return projections in order to look to see how that impacts the Roth conversion strategy. For this video, about 5% for that 60-40 portfolio. Excellent question.

In regards to your second one here, Roth conversions seem to work best when they aren’t stacked on top of other income. Well, important distinction here. I know what you’re saying, but they work the same, right? Because we’re moving money out of this tax-infested place into a tax-free environment. What you’re actually saying is I can convert more when I don’t have other income. Yes, that’s a 100% correct but the key thing here is to have visibility into your current tax bracket, how much income you have, and then how much room do you have before the next tax bracket. It’s step two, really.

Step one is identifying if I do absolutely nothing with certain assumptions, how much are my accounts expected to grow? How much am I forced to take out because of required minimum distributions, and how much, prior to RMDs, am I going to take out for spending? Of course, you have inflation considerations there so we have to identify what I call the point of equilibrium, which is the sweet spot, for lack of a better term, to where your account balances achieve your need to generate income over time. You don’t get into a situation to where you’re forced to take out these massive distributions because of RMDs later in life.

Whether you’re working or not, the sooner you can create visibility into how all of these variables impact your retirement security, you can then start to identify where you’re currently at and then what makes sense as far as targeting specific brackets. If you have a lot of money in your retirement accounts, you may want to target the 22% or the 24% bracket. We have to also take into consideration the tax Trump cuts that go away in 2026, where the tax brackets are going to be compressed and the tax rates are increasing. You have to make that adjustment as well, but it all comes down to visibility and finding that point of equilibrium to where first and foremost, you have a secure plan.

We don’t want to ever let the tax tail wag the dog, meaning we don’t make decisions to reduce our taxes if it comes at the expense of our overall retirement security. We want to find that point of equilibrium to where we pay the least amount of taxes that we possibly can expect to pay while at the same time increasing our security with regards to our portfolio’s ability to generate the income we need based on our vision for retirement and accomplish those objectives.

What happens with Roth IRA Conversions if one spouse dies much earlier than expected?

Our next comment comes from Bill Moss and essentially he says here, “Great video.” Thank you very much. “Now that we’ve established the benefits of a Roth conversion strategy at different claiming ages, a suggested follow-up video could be what happens if one spouse predeceases the other. What happens to the Roth conversion strategy? What happens to Social Security?” He says one spouse passing away, let’s say at 75 with a bigger Social Security check or the lower-earning Social Security spouse passing away at 75. Does that really make a difference in the overall plan?

It’s a really, really good question. I think we are going to do a follow-up video on this because I don’t want to go too much in-depth. The big thing I want to point out in this video is that the Roth conversion strategy typically becomes far more advantageous if one spouse passes away prior to the other spouse or predeceases the other spouse early because you go from the married filing jointly brackets to the single brackets. Again, we have a major compression of the tax brackets happening in a couple of years. The Trump tax cuts go away.

Just for example, right now, you can have around $380,000 of income before you leave the 24% bracket. In 2026, that’s going to be about cut in half. It’s going to be about $175,000, $180,000, maybe $190,000 of income married filing jointly, both scenarios, before you are now leaving the 25% bracket. You can have about half the income before you go into the next bracket in a couple of years.

Now, that’s the married filing jointly brackets. You almost have to cut it again in half once you start analyzing the single tax brackets. If you don’t do any planning and this tax-infested retirement account balloons to these large amounts, once you start required minimum distributions, if one spouse predeceases the other, you may find yourself in a position to where yes, one Social Security check goes away, but you still have one Social Security check, and now you have these massive RMDs, and you’re in the single tax brackets, and you very well could be paying a lot more taxes in that scenario than you would otherwise.

Under what circumstances would it pay to continue the ladder until everything is converted to Roth? Is it a large taxable account you can live off of? What if you don’t need the RMDs?

One more comment for this video, but because there are so many good comments, I’m actually going to follow up and do a second video continuing down this comment chain, but I want to be careful. I don’t want this video going 45 or 50 minutes. PKash4088 says, “Thank you for the thoughtful analysis. Do you know under what circumstances would it pay to continue the ladder until everything is converted to Roth? Is it a large taxable account you can live off of, a pension, or other income? What if you don’t need the RMDs? Thank you very much.”

This goes back to that concept of equilibrium. For most of our clients, we rarely plan on converting the entire IRA. It’s because we create visibility into the impact of the decisions that we’re making today, what they have on the future. Then year by year by year by year, we’re updating everything, recreating what that visibility looks like, and we’re able to maneuver and to adjust. When your spending needs change, for example, your IRA account balances change, your Roth account balances change, the analysis usually changes pretty substantially in subsequent years. We’re able to adjust the tax strategy based on trying to find that equilibrium point.

If your account grows more than expected, then the analysis changes. If you spend less or spend more, the analysis changes. What we’re really trying to get to is the point to where your future income needs can be supported at a modest level from the IRA, so we’re not in this giant tax bracket potentially later in life, making Roth distributions, making non-qualified distributions. We call that a multiple-account distribution strategy. We’re trying to just consistently take snapshots of all of these variables over time and then adjust so that your income needs are provided with the least amount of taxes paid over the long haul.

I know that’s not the most simple explanation, but stated another way, we’re trying to identify how we can make good decisions today to help you pay the least amount of tax based on all the information that we have over time. Then, because it’s dynamic, everything is dynamic. Your account balances, your spending, the tax code, your wishes, what you’re trying to accomplish, your health, all of these things, everything is dynamic. We have to keep doing that analysis and keep making adjustments according to all of these shifting dynamics inside the plan. We’re simply trying to help you pay the least amount of taxes over time by developing an income and tax strategy that meets your objectives, and then just doing the analysis over and over again as time progresses and making adjustments where needed.

To be very direct and answer that question with an example with numbers, let’s say we create a plan to where we want to have about $400,000 left in the IRA after we’re done doing conversions. Well, what we project is, based on growth in that account, based on the required minimum distribution in that account, based on your income needs, based on how much Social Security you have, based on how much money you have in other accounts where we can pull from in a more tax-advantaged manner, we can satisfy that requirement on distribution. It can pair with your Social Security income, any dividends, interest, other income you may have. That complete number meets your inflation-adjusted spending goal in 10, 15, 20 years.

That’s what we’re constantly trying to adjust, is how much are we converting in order to reduce taxes over time, but also we don’t want to convert so much that everything is tax-free and then we’ve overconverted. The downside of overconverting is now we’ve taken money out of the accounts that you don’t have to earn interest on, the money that we pay taxes with. That could be a situation where you just end up with less than you otherwise would have. Doesn’t mean you’re going to be in the poorhouse or eating beans and rice like Dave Ramsey would say, but our job is to help optimize, to provide value.

By doing that consistently over time, we’re trying to identify what is the appropriate balance so we can generate income that pairs with your other income sources to meet your inflation-adjusted income need and make adjustments as time goes on to continue to find that point of equilibrium.

🍿Check out the original video where we answered, “What is a Roth Conversion Ladder?” with a few case studies modeling how it can save you up to $600k in taxes. It includes the basics of income distribution planning, tax strategy, and Social Security optimization so you can navigate your own retirement planning with heightened financial visibility and potential savings. Watch that video here:
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