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6 Questions to Ask Before Making a Roth IRA Conversion - YouTube
Channel: Prana Wealth
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In this video, we're going to cover the
six questions that you need to answer
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before making a Roth IRA conversion.
Let's get started.
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Hey there. This is Patrick King with
Prana Wealth. On this channel, we help
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you build your wealth faster so you can
make work optional
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sooner. So if you're new here, please
consider subscribing.
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With tax-free growth and tax-free
distributions,
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Roth IRAs can be a wonderful way to fund
retirement.
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Unfortunately, it's not easy to get your
money into these accounts in the first
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place.
Converting some (or all) of your
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traditional IRA into a Roth IRA
is tempting. But does it make sense? Here
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are six
questions to ask before making a
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year-end Roth IRA
conversion. And be sure to watch to the
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very
end for a special strategy that's only
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available in 2020.
Question 1: Do you expect your income
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to be higher in future years? For high
earners who are consistently in a high
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tax bracket year after year, a
Roth IRA conversion may not be a smart
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strategy.
Instead, work to maximize tax-deferred
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savings into traditional retirement
accounts
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such as your IRA, 401k, or other employer
plans.
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However, if your income this year is
lower than you would normally expect
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it to be going forward, it may be a good
time to consider a conversion.
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For example, someone who has been
furloughed, lost their job
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or seen their incentive or bonus
compensation reduced this year
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could see their effective tax rates drop
in 2020.
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Of course, any consistent earners who
weren't in a high tax bracket to begin
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with
may be great candidates as well. Question
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2:
Do you expect to be in a lower tax
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bracket
in retirement? Similar to Question 1, if
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you expect to be in a lower tax bracket
in retirement,
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then a Roth IRA conversion may not be an
ideal strategy for you at this time.
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Instead, focus on those tax-deferred
savings to reduce taxes today.
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You can always revisit this strategy in
retirement when your taxes are lower.
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Question 3: Do you have enough cash
to pay the taxes? Remember, you will still
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owe taxes on any amount that you convert.
If a Roth conversion looks favorable,
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then you need to ensure that you can pay
the tax bill when it comes.
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You certainly don't want to be in a
position where you'll need to liquidate
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other assets in order to meet your tax
liability.
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If you have sufficient cash on hand to
pay the tax bill,
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then a conversion is still a possibility.
Question 4: Will you need the money
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within five years? Roth IRAs are great,
but they come with a handful of odd
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rules.
Specifically, Roth IRAs have what are
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known as "five-year rules".
One of which is that you aren't allowed
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to withdraw funds from the Roth IRA
within five years of the first deposit.
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The withdrawal rules can be complicated
and would make a great topic for a
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future video.
If you think you may need access to the
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Roth IRA funds within five years of your
conversion,
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be cautious. You certainly don't want
to run afoul
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of these rules and incur penalties that
would wipe out the benefit
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of making the conversion in the first
place.
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Question 5: Are you age 63 or older?
A Roth IRA conversion can increase your
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taxable income,
and therefore could potentially increase
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your monthly Medicare premiums.
Medicare means testing has a two-year
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look back,
so if you're age 63 or older, then
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proceed with caution
before making a Roth IRA conversion.
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Be sure to keep an eye on your Modified
AGI
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to avoid this bump in Medicare Part B
premiums.
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You can do this by limiting your
conversion amount so that you keep your
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Modified AGI
below the next premium adjustment
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threshold.
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Question 6: Is the market down?
If you've gotten this far and a Roth IRA
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conversion may still make sense for you,
the final consideration would be the
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relative value of your investments.
If your portfolio is down a bit, then you
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may have the opportunity to convert
while things are on sale. Of course it's
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nearly impossible to time the market
perfectly,
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so the entire strategy shouldn't hinge
on whether the stock market is up or
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down.
Any conversion should still make sense
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regardless of asset valuations.
So, how much should you convert? If you've
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answered these six
questions and a Roth IRA conversion
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still makes sense,
it's time to start thinking about the
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amount to convert.
This is a great time to bring in your
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financial advisor and CPA
to help you. Typically, the amount of an
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opportunistic Roth IRA conversion
will be the amount that it takes you to
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get to the top of your current
tax bracket, but doesn't push you into
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the next one. Just remember,
tax brackets are marginal though, so
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don't stress if you go a little over.
If you go one dollar into the next tax
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bracket, only that one dollar is taxed at
the higher amount.
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If you're considering a Roth IRA
conversion and would like to talk it
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over,
then visit us at pranawealth.com to see
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if we're a good fit.
As a fee-only financial advisor in
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Atlanta we can and do
work virtually with clients all across
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the U.S.
We've helped many clients make strategic
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Roth IRA conversions in the past
and we're here to help you when you're
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ready.
Now finally, here's that bonus strategy
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for 2020.
If you're retired and have been taking
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required minimum distributions from your
retirement accounts,
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2020 offers a unique opportunity for you.
As you may know, the CARES Act has
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suspended RMDs for retirement accounts
this year.
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That means you may be in a lower tax
bracket in 2020.
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If you don't need the money that you
would normally take out of your IRA,
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then you may want to consider making a
partial Roth IRA conversion,
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depending on your tax situation. It's
potentially a great move
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if you were already planning to leave
money in your retirement accounts
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this year. Of course, please consult with
your financial planner and CPA to
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confirm if this strategy
would work for you. Hey, if you found this
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video helpful,
please help me grow my channel by "liking"
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this video and subscribing.
Thank you so much for watching and I'll
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see you soon.
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