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Stop Adding to Your Roth Account - YouTube
Channel: Centennial Advisors
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[Music]
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welcome to another edition of mike on
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money i'm michael ries certified
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financial planner
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founder of prosperity planning system
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and ceo of centennial advisors where
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it's our job to help you
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enjoy financial prosperity uh as easy as
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possible right the easiest path to
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financial prosperity so today we're
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going to talk about the question of when
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you should
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not
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do a roth conversion and so this could
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be pretty exciting because if you watch
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us you know that i'm a huge fan of
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getting money into roth iras but there
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are some situations where you should not
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do a roth conversion and that's what
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we're going to talk about today on the
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screen we are looking at the 2021
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federal income tax brackets uh for both
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single married couples filing jointly
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and i think heads of households right so
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uh i know anytime we talk about taxes it
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gets a little bit crazy um for purposes
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of today's discussion i'm gonna focus on
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this middle column
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the married filing jointly now if you're
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single
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the same concepts apply but they will
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apply for single individuals in that
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column we often get the question like
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people come in all the time and they say
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this they say mike mike
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i know i need to be doing roth
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conversions
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my question is not
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should i be doing conversions my
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question is how much should i do each
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year before we go any further
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you know when you say i know i should be
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doing roth conversions ah don't not so
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fast maybe you should not be doing them
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but
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generally speaking
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generally roth conversions make a ton of
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sense for almost everybody right i mean
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it's not like everybody should do it
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there's no such thing as everyone should
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do something especially when we're
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talking about taxes but
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generally sure i would agree with that
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every you know roth conversions probably
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makes sense especially if you look at
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the long-term impact of holding money in
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iras and 401ks and by the way if you
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don't know what a roth conversion is
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it's where you're moving money from an
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ira so you already have money in an ira
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or 401k and you're moving it or
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converting it to a roth ira
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now why would you do that because in an
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ira or 401k the money's growing tax
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deferred but someday you got to pull
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that money out and pay tax and those
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required distributions once you hit 72
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you're forced to pull money out each
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year that could get ugly
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roth iras on the other hand
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once you get the money in a roth ira
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it's tax-free it's tax-free forever
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tax-free growth tax-free distributions
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tax-free to your beneficiaries
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but if you want to move money that's
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already in your ira and you want to move
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it to a roth ira let's say you i've got
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a million dollars in my ira and i want
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to move a hundred thousand dollars to a
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roth ira well guess what you got to pay
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tax now today
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on the 100 000 that you transition over
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so the question is
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should i pay tax today
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we're off conversion or should i pay tax
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later on
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not doing a roth conversion in order to
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answer those questions we need to look
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at some tax tables oh no tax table i
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know what you're thinking like no mike
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don't do that to me i hate taxes they're
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complicated i know
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i know they are but remember what am i
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my job
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my job is to make it easy on you right
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so let's go ahead and see what's going
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on here
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this middle column married individuals
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filing jointly here's what's kind of
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interesting look at this for 2021.
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look at this number right here
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here let's roll that up make it a little
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higher on the screen
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329 850
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that is how much
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taxable income
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a married couple can have in 2021
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and pay 24
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tax right here
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or
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less
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less because remember
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um
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you're only paying 24
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on the amount that falls above 172 but
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below 329. so basically here's the point
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you can have up to 330 000 basically
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taxable income
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and pay 24 or less tax
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taxes have never been that cheap
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never
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now by the way
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you also have a standard deduction
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that's down here for a married couple
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it's 25 000
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so if you add 25 000 to this 329 330
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basically what does it say your agi
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adjusted gross income if you take the
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standard deduction you could be like 355
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and it's 25 24 tax or
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less
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that's awesome
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that's not good that is awesome
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by the way
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if you like donald trump or hate donald
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trump either way
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thank you donald trump because without
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him that wouldn't have happened if you
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are single
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here's your number
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164 000 tax we'll call it 165
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your standard deduction is about 12 000
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so you added on you can have about 176
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000 of income as a single taxpayer
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and being 24 or less
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if you are below these numbers
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roth conversions
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very
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likely make sense i didn't say
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definitely did i
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very
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likely
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make sense if you're below the if you're
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in the 24 bracket or below
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and if you're in the 24 bracket or below
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it
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likely
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makes sense to do conversions
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up to
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but not exceeding that 24 number but
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here's the deal what if you are in your
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60s
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well you got to think about medicare
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premiums if you do conversions up to you
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know these numbers you might have
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problems paying extra on your medicare
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so you may not want to do that much what
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if you're younger than 60 every time you
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do a conversion you got to think about
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where are you going to get the money to
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pay the tax
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if you're over 59 and a half you can
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just deduct it out of the new roth ira
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but here
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if you're younger than 59 and a half how
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are you going to pay the tax that might
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be a constraint
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but general rule of thumb
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the window of conversions if you are
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single
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up to taxable up to the top of the 24
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bracket is your
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general rule of thumb that's your window
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so when should you not do a convert
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version how about this
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the other day
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let's scroll down a little bit more in
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these tax brackets
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the other day
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i came across this couple
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both of them working
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both of them are executives
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their household income's like
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550 000
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and
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if they they're planning on retiring in
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a few years
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and when they retire they want their
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household income they say hey when we
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retire we could live on 150k easy
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so right now they're at 500 so where are
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they oh 35 they're way down here
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they're in the 35 bracket
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and by the way
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with the new tax code coming out their
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income's really going to be at 39.7
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tax and maybe even higher
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but in a couple years i want to retire
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to what number 150 look at that that's
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way down here in the 22
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range right here
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so does it make sense today for them to
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convert at a 35
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rate way down here
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when they're only going to pay a 22 rate
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later on does that make sense paid 35
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today
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to avoid paying 22 later on the answer
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is no
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that couple
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i told them
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no conversions right now you're just
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making too much money by the way as an
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aside the new tax code what they want to
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do in washington dc they want to say
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look if you're a married couple you're
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making over 450 and if you're single
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you're making over 400 you're not going
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to be able to do conversions at all is
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what they want so if you're way up here
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in these higher brackets
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converting today
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when you're going to be you know you're
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going to be in lower brackets in the
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future
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may not make sense
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now what's interesting is sometimes it
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still makes sense especially if you have
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a huge ira like if you're 401k your ira
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is like three or four million dollars
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believe it or not it might make sense to
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just convert the whole darn thing before
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the end of the year even though you're
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gonna be in lower tax brackets later
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and the reason for that is when they're
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that big
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what happens is yeah you're in these
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lower tax brackets for a while but at
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some point when you hit age 72 your
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required minimum distributions are so
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large they push you down here anyway
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everybody's different now remember we're
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talking about taxes here
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everybody's different
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your situation is different from your
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neighbors it's different from your
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brothers and sisters
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everybody's different
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so don't be taking this
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and saying oh mike just said if i'm not
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if i'm less than 24 i should fill that
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bracket up
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that may not make sense for you i'm
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telling you though
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if you are below the 24 bracket
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odds are good that it makes sense to
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do conversions at some level
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and don't go above the 24 bracket
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probably
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if you are way up here in your income
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right now heck i would even say if
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you're above 330 if you're in the 32
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bracket or above
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for now i probably would not do roth
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conversions
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i'd wait until i'm retired when i'm in
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maybe a lower bracket potentially
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but here's reality
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this is where you need to sit down with
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someone that does tax
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planning not preparation tax prep is
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just filling out your tax return
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tax planning you need to sit down with
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someone who is who has the capability to
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help you map out
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what your future looks like from a tax
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perspective you know if you keep doing
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what you're doing now where does that
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take you from a tax perspective
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and then
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right then you can start playing with
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roth conversions and saying well what if
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i do this what if i do that how does
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that impact the total tax that you pay
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over time
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you need that type of analysis to make
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the really smart decisions uh here
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but there you go general rule i'm giving
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you general rules of thumb
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doesn't mean they're going to apply to
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you
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taxes are a little complicated
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everybody's different let's make sure
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you're making the right choices all
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right
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that's our message today if you have any
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questions feel free to leave questions
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in the comments below if you like this
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give us a thumbs up
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subscribe share this with your friends
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that's our episode this week we will see
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you next time
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[Music]
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you
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