Marc Killian  00:19

Welcome into the Roth guy. Thanks for hanging out with Jude and I as we talking about and I as we talk investing, finance and retirement. And this week, Jude is going to help us break down the top five mistakes he sees when it comes to dealing with Roths or Roth conversions. I suppose I should say, right? That is the the full piece of that. So what’s going on, my friend? How are

 

Jude Wilson  00:35

you man, living the dream? As my favorite movie would say, Well,

 

Marc Killian  00:38

I’m gonna put you on the spot. This week, I want to talk about these top five items that we’ve got. These are things you guys see in the practice, right? So when people are doing Roth conversions, for sure, dealing with those and just kind of, you know, some of the stuff that you can run into, right? They kind of kind of mess you up there. So let’s just get into it. Let’s start with the first one, which is converting too much. And now, would this be like in a calendar year kind of thing, or because over time is really what you want to do,

 

Jude Wilson  01:04

right? You’re absolutely right. You want to convert over time. But some people get really aggressive about their Roth conversions. They want to see all of their money in tax free later, and and so doing too much in a year can cause what I call the domino effect, and can really create more havoc than the good that you’re trying to accomplish. Let’s get let’s do an example. Let’s say you had taxable income of $80,000 and you convert 100,000 well, that chunk could push you up into the 32% tax bracket, instead of keeping you where you might have been in the 22% tax bracket. So doing too much could ask you could actually cost you more in taxes than what you attended. So we use a little strategy that we call tax bracket bumping, making sure that we’re looking at your total income for the year, taking into into account any itemizations that you may get from doing itemize itemized deductions or the standard deduction, and coming up with a number that you can convert while staying at the top of the bracket that you’re currently in, or looking at how much more you can do that may kick you into the next bracket, gotcha.

 

Marc Killian  02:24

Gotcha, right? Because when you’re thinking about doing the conversion, especially if people want, kind of wanting to get it done, they’re like, hey, you know, they hear all the conversations. You know, converting free money is the best money. And once I get it paid for, it grows, you know, it’s going to grow, and I won’t have to, you know, getting more taxes built up on it because the Roth, but to your point, you want to do this smartly, because otherwise you don’t want to change that tax bracket. And I guess probably part of that Jude is that with the current tax law set to expire, we’ve been thinking that if you don’t get this stuff done by the end of 2025 you’re missing out. Right, right? And as we’ve talked about the last couple episodes, we don’t know yet, because they haven’t gotten there yet, but there’s a likely chance that they’ll extend that because, you know, Trump’s in the office now, and that was his tax cut program from back in 2017

 

Jude Wilson  03:12

absolutely the tax cut and Jobs Act, and you’re so right there, there. I think the media and people who pay attention to finance gurus have felt this certain pressure to do it, and to a certain extent, they’re right, because taxes are on sale. Now, if you look at where we’ve been at historically, but you you should do the math at the end of the day, or seek a qualified professional that can kind of help guide you and do the math for you, because there’s also break even to consider, but the first place is to think of not causing yourself more harm than good by kicking you into another tax break. Yeah.

 

Marc Killian  03:48

And I guess these five items, dude, they kind of maybe will domino each other a little bit, absolutely.

 

Jude Wilson  03:53

I call it the domino effect, okay? And I see this all the time in the practice, when people come to me and they, they they’re excited about listening to the Roth guy, or they’ve attended a seminar that I’ve done, and kind of like a kid at Christmas Eve, they’re so excited to open the Roth packings out. I’m gonna do Roth conversions, dude, this is my idea. I’m like, whoa. Wait a minute. But

 

Marc Killian  04:14

yeah, all right, so let’s do the second one then. So converting too much, it one time, right in a calendar year, causing a tax issue, basically, not maximizing the tax steps, right? Yeah, so to considering what that does to your Medicare, Medicare, so Irma, right? So by converting, you’re going to cause yourself this lovely little Irma tax, Uncle Sam and Irma got the hands in your pocket,

 

Jude Wilson  04:40

the dynamic duo, and we’re not too thrilled about Irma. So here’s the situation. Your Medicare premiums are based on your income, and particularly looking at from two years prior, two years exactly two years prior. So with that, let’s. Kind of, let’s give an example. Let’s say you’re 63, years old, and you plan on doing a big Roth conversion. We had a prospective client come in one day, and he had $2 million in an IRA, and he wanted to aggressively convert half a million dollars a year, so that over time, he’d convert the whole thing after we did the math, not only did we see show him that that would cause him additional tax by putting him up into the next bracket, but what he did not anticipate was the Irma surcharges, so that would have caused him to have the highest Medicare premium and and it stays in existence for the next two years. So we were able to save him 1000s of dollars by calculating exactly how much he should convert that one wouldn’t kick him into the into the next bracket, and two wouldn’t greatly affect his Medicare premiums,

 

Marc Killian  06:01

yeah. And so it’s doing that look back, right? So if you do, if you do a bunch of conversion now, and you think, okay, you know, I’ve got it, whatever we’re, you know, we’re good to go. Just remember that in two years when they go back and look at that, you may be paying now higher premiums. So, you know, it kind of comes back to bite you a little later because you’ve forgotten about it. It’s two years ago, right? Absolutely. Yeah. All right. So then it leads to this one, and the next question is, how do you pay for it, right? So I want to do the conversion. If you want to use that guy as an example, it’s like, oh, okay, I got like, 2 million in this account. I want to aggressively convert. Where do I pull the money from? Is it money that I have in my savings account, or do I just use it from the IRA, right? And I think a lot of people use the IRA, yeah,

 

Jude Wilson  06:43

which is a big mistake, okay? And this leads into the whole reason for our show. Yes, we’re the Roth guy, but we talk about holistic planning, right? And in our holistic plan, one of the first things that we do is set up our buckets, our bucket PLAN strategy, and we’ve talked about this before. The now, the soon and the later bucket, well, your now bucket is our dollars that are sitting on the sideline, and you’re checking savings, money markets, CDs, those type of things. And so you should have a properly funded now bucket. The reason I allude to that is when we’re doing more planning for our clients, we’re looking at paying the taxes in a Roth conversion from that now bucket money that you take out of the IRA to pay for the Roth conversion is the least effective way of doing a Roth conversion,

 

Marc Killian  07:36

yeah, because you’re tapping into that the Growing Power, right? Because you’re pulling out of it, right? So you’re taking away from some of that growth potential out there in the market, all right. So then the five year rule, what is that? And why is that a mistake?

 

Jude Wilson  07:53

Well, a lot of people assume that you can do Roth conversions, and then you can pull out the money from the Roth at any time, because

 

Marc Killian  08:03

you’ve made it tax free, so now I can get to it. Blah, blah, blah, well,

 

Jude Wilson  08:08

that’s so fast there’s, there’s a little five year rule that maybe people don’t know about, which means that the dollars have to be sitting within the Roth for five years before you can, before you can pull out any of the any of the earnings. So if you’re 55 years old, and you do a Roth conversion, you need to wait till at least 60 to withdraw money without any penalty. And if you’re doing that with the thought process, making this conversion with the thought process that I’m going to be able to pull out money when I retire next year, you could be causing yourself more harm than good,

 

Marc Killian  08:47

yeah. And so it kind of leads to the fifth one here. Is tax, just an overall tax strategy to be efficient with it. But really, again, if you think about it like we said, these kind of all play together. If you Roth over time, Jude, you’re kind of maybe be able to get yourself really, really where you want to be, because you’re going to satisfy the rule. You’re going to get the because it’s getting the clock started, correct.

 

Jude Wilson  09:08

Absolutely, absolutely, yeah, it’s just, you know, doing it as as soon as possible to get that clock started gives you so much more flexibility, even if you just convert $100 you know, at least the clock got started, or establishing the Roth, you got the clock started. So, yeah, I couldn’t, I couldn’t stress that more, okay,

 

Marc Killian  09:29

and then, of course, again, the fifth piece being the overall tax strategy, how all this stuff is going to affect you and play together. And that’s, again, why maybe an effective strategy is to try to build a rothing over time, you know component to your portfolio? Yes. So

 

Jude Wilson  09:43

one of the proprietary strategies that we use to help our clients, we call it the tax management journey. There’s seven steps. It looks like a literal map, and there’s seven steps on the map. Fact, we can. Include it in the download, but each one of the steps allows us to do an analysis of a client’s tax situation and make some observations and and so when we’re coming up with a Roth conversion strategy, not only do we want to take into account your tax brackets, Irma surcharges. But we want to configure, you know, your your buckets correctly. We want to think about what we want to think about when is the most appropriate time to do the Roth conversions. So it’s not a one size fits all, and that’s the thing I tend to see with some of the Instagram gurus kind of hyping people up to just do these Roth conversions. And you really should have an overall plan to make the most out of the Roth conversion. Yeah,

 

Marc Killian  10:53

and we’ll put some links on the show notes below. So if you guys want to go check some stuff out, there’s a lot of good resources at Jude’s main website, which is centrist fs.com we can put those links in there, but we’ll also have it into the one we promote for the show often, which is the tax bomb.com so we’ll have all that information in the show description for you below, so you can go check that out. Yeah, so I mean, just at the end of the day, right? So you guys do this stuff for clients day in and day out. You’re doing all the different pieces that makes up a holistic retirement strategy and Roth conversions is a big piece of that the last couple years. So avoiding mistakes pretty crucial.

 

Jude Wilson  11:28

Absolutely you know, whether it’s now or in the future, you want to be proactive and make sure you’re making the the best use of your dollars to get you to your end goal, and having a holistic plan is a big part of it.

 

Marc Killian  11:44

Yeah, exactly. So if you guys need some help with that, making sure that you’re not stepping into some of these top five Roth conversion mistakes now not contributing to the Roth conversion mistakes, then make sure you reach out to Juden team again links in the show descriptions below, and that way you can get yourself some time on to the calendar with Jude and his folks over there at centrost Fs. Thanks for hanging out with us here on the Roth guy. Don’t forget to subscribe to us on Apple Spotify, and, of course, YouTube. And we appreciate your time. And Jude, we’ll see you next time, buddy. Thank you, my friend. Stay out of trouble. Stay safe and sane, and we’ll catch you later here on the Roth guy, you

 

Walter Storholt  12:23

financial planning and advisory services are offered through prosperity Capital Advisors, PCA and sec, registered investment advisor with its principal place of business in the state of Ohio, centrist financial strategies and PCA are separate non affiliated entities. PCA does not provide tax or legal advice, insurance and tax services offered through centrist financial strategies are not affiliated with PCA. Information received from this podcast should not be viewed as individual investment advice. Product discussions and illustrations are hypothetical in nature and will vary based on many factors, including, but not limited to age, health product insurance carrier and product design, you should consult the insurance carrier website and policy for detailed information, for information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Advisor public disclosure website, www.advisorinfo.sec.gov, for Additional information about PCA, including fees and services send for our disclosure statement as set forth on Form ADV from PCA using the contact information herein, please read the disclosure statement carefully before you invest or send money you.