Roth Conversions Are A Tax Planning Strategy | The Retirement Income Show

Mark: Glad you’re with us today for The Retirement Income Show with Troy Sharpe, the CEO, and founder of Oak Harvest Financial Group. You can certainly just check Troy out on YouTube. There’s over a hundred videos that he’s put together, him and his team about different areas of retirement planning, the financial world.
Just search for Troy Sharpe and Oak Harvest on YouTube and you have the opportunity. There’s no cost to do this. A great opportunity for you to learn more about some areas maybe you do have concerns about. YouTube, search for Troy Sharpe and Oak Harvest. Of course, you can always give the team a call if you have questions, 800-822-6434. Has got one of the great websites too, there are a lot of great information there,

We’re talking about some of the proposed policy changes that are in the works right in congress, and Troy, you spend a lot of time talking about the IRAs, 401ks, those tax-deferred items that we have in our portfolio, our retirement toolkit if you will. That’s one of the biggest challenges. It’s not our grandparents’ retirement anymore. My grandparents, I think did retire to a lesser of a tax burden when they got to retirement.

Today’s retirees because of the IRAs and 401ks and all of that tax-deferred money sitting there, we’re almost retiring to a higher tax bill if you will, but you said there, you see some common mistakes in this Roth conversion, and you said time is running out. We know the Trump tax bill that kind of went in– was in the year of 2017, but went into play January 1 of 2018. That is going to expire, for individuals and families, December 31st of 2025 if the Biden administration does nothing.

We know by 2026, we’re reverting back to 17 rates and brackets, but the Biden administration certainly has a lot of things in the fireworks right now about dealing with taxes. I guess, start with some of the common mistakes you’ve seen in the Roth conversion world, and that window of opportunity is closing for us to do some of this.

Troy Sharpe: Yes, and I was chuckling there because I have, in front of my little sheet of paper here from the prep work that I was doing, all the different aspects of the tax code that are proposed to be changed with this new Build Back Better legislation, and I only really covered the Roth conversion one, so I’ll touch on some of these other ones that impact you and your family depending on your circumstance.

Real quick, some of those common mistakes we see people doing Roth conversions, the biggest one, hands down, is people not doing enough. Okay, so if you have, let’s say, a million dollars in your 401k or $2 million, or whatever that number is. If you do a $25,000 conversion, it is completely pointless. Now, sorry, I should say it’s not completely pointless, but it’s virtually pointless. It’s like me saying, “You know what, the ocean really needs more salt. I’m going to take this bag of Mortons and I’m going to drop it off the boat.” You’re not moving the needle. You’ve done something, but you’re not moving the needle.

If you look at, especially with– and we have a big announcement we’re going to talk about in a little bit too, about the federal reserve here and how it impacts your retirement. If you look at what the Federal Reserve has done to stimulate the stock market over the past couple of years, it’s very easy for you to have seen your accounts go up 20, 30, 40, 50%, in some cases, even more over the past couple of years.

If I have a million bucks in my retirement accounts and I do a $25,000 conversion, I’ve moved 2.5% over to the Roth. Now, let’s say that 25 grand grew 20%, great. It’s now worth $30,000, but I still left $975,000 in my IRA or my 401k. If that grew 20% because it was invested and that’s why the accounts went up, that’s almost another $200,000. You have actually done nothing to improve the problem. Now you have, let’s call it 1.2 almost inside that 401k or retirement account, IRA, and 30,000 inside the Roth. Have you actually done anything to significantly improve your tax situation? No, you’ve not.

That’s the number one mistake we see is people simply not doing enough because, one, they don’t want to pay the taxes, and I get it, but let me be very clear about this. Retirement tax planning and income planning and retirement, in general, is not about not paying tax. You are going to pay tax. There’s no way about it. No way around it. The only question is how much tax do you pay over the course of your retirement?

We had a great couple come in recently and I’m not taking as many appointments as I used to. I’m actually taking very few appointments so I can focus on the culture of the company, the vision of the company, growing on the company, or the company growth. Mark, I don’t know if I told you or our listeners, we were actually just named on the Inc 5,000 list number 1722 on one of the fastest-growing private companies in America. I don’t know if I told you that.

Mark: I think you might have mentioned that last week, but that’s pretty impressive. Congratulations.

Troy: I’m more focused on making sure that we grow within ourselves. We have organic growth. We’re not here buying other firms. The marketing, as far as the message it’s resonating with people, we need a plan, not just investments. If you’re paying someone 1% and you’re not getting tax planning, you’re not getting income planning, you’re not getting estate planning, healthcare discussions. If you’re not getting all of this, I think you’re probably paying too much.

Getting back to one of the last couples here that came in, that I’ve sat with. A great couple, they come in, they say, “Troy, we’ve listened to you for several years, but we’re retiring next month.” Whenever I hear this, the first thing I always think is, “Well, why do people wait until they retire before they actually come in and see us?” 9 times out of 10, if you come see us a year before retirement, two years, five years before retirement, there’s a lot that can be done to help get you into a better position in retirement, but regardless, they come in, we sit down, we have a cup of coffee, we start to go through their situation, their fears, their concerns, what they’re trying to accomplish.

One of their goals, which I absolutely love planning for is I’m a big believer in spending the money while you live. You can’t take it with you, and I completely get, we want to make sure our children, our grandchildren, that they have an opportunity to have a better life than we did, and nothing wrong with wanting to leave money behind. That’s a very, very good cause, it makes a lot of sense, but there’s also this balance between focusing on leaving too much behind and enjoying it, spending it while you’re living.

We always talk about this when we’re doing income planning, and we’re getting to know someone, how much can we spend? Let’s stress-test this plan. Let’s say, once we get to work, if you become a client, we’re doing these reviews, we’re constantly stress-testing the spending level because we want you to enjoy your money. This is why the Retirement Process, the Oak Harvest Retirement Process process is so cool, because when you know where your income’s coming from, how much you’re going to have, how it’s going to increase with inflation, how you’re going to pay less tax, how your spouse is going to be okay if something happens to you.

When you have all the answers to those questions, you feel more comfortable spending your money in retirement. It’s that simple. We were always stress-testing, how much can we spend? Of course, we want to be cautious, and our number one job is to protect the money and make sure that you have enough to ensure you don’t outlive it, but we want to see you enjoy it.

They wanted to take their children and their children spouses, and have these big vacations down in Galveston, where they go and they rent this big house. They want to do it at least once a year, ideally twice a year, and they pay for everything, and then we started talking. They’re like, “You know what, it’d be really cool if we could afford to fly everyone out to maybe Colorado and do a ski trip. Maybe the kids can chip in. Maybe they can help, maybe they can’t, but we want to know that we can do this.”

We go through the rest of the process here. Our team– they leave between that first and the second visit. Our team, what we do is we start to do the analysis and we say, “Okay, how can we make these dreams become a reality? How can we make this vision that these prospective clients have, how can we put it into a concrete action plan where they can feel comfortable making this happen?”

Now, sometimes it just won’t work, or we need to work a little longer, or we need to anticipate spending a little bit less. Maybe it is Galveston, and maybe it’s not Colorado, either way, we want to put that concrete action plan in place so you feel comfortable spending the amount of money during your early retire years without the fear of running out down the road.

The team gets to work. We come back, or they come back into the office for the second visit, and we have a big television screen. If you watch any of the YouTube videos, you’ll see I do a lot of these financial planning case studies, and we pull it up and they’re looking at the big television screen. We’re going through their current situation. They were working with advisor partially over the years, some broker they ran into at some seminar a long time ago, who sold them some variable annuity, some life insurance strategy, et cetera. Wasn’t really working for them. Wasn’t a great piece of the overall puzzle.

We went through the analysis of that. We explained why. Long story short, we get to the tax part of the presentation where we do a tax analysis and people always say, “Troy, how come my advisor isn’t talking to me about taxes?” Their advisor, of course, wasn’t talking to them about taxes.

We go through the tax presentation or I should say the tax analysis. If they keep doing what they’ve been doing versus the way we would recommend they do it, it was estimated that they would spend over $800,000 in additional taxes during their retirement. You talk about where you’re going to get your money from to do these trips? That’s a great place through tax planning.
1-800-822-6434. 1-800-822-6434. This is The Retirement Income Show. Check us out on YouTube at Oak Harvest Financial Group

Mark:, the website for Troy and the team at Oak Harvest. We’re talking about the policy changes that are in front of Congress right now, and certainly, one of the big things you can do are those Roth conversions. They’re not right for everybody, which is why you need to talk with somebody like Troy and the team at Oak Harvest before you do any of this.

Do you want to make them costly mistake but what are some of the other proposed changes? We’re going to talk about those when we come back. Stay with us, this is The Retirement Income Show with Troy Sharpe, the CEO, and founder of Oak Harvest Financial Group.