Roth IRA Conversion Pros and Cons in 2022 - YouTube

welcome back to the channel and if it's your  first time here you couldn't have picked a  

better video to watch no matter what your  income level currently you can convert an  

unlimited amount of assets from traditional  IRAs to Roth IRAs if you pay the taxes now  

now there used to be an income cap but that tax  law was changed back in 2010 to allow anyone  

the opportunity to convert that huge advantage  may be slipping away as a reminder if you have  

traditional IRA assets you took a tax deduction  at some point in the past and you will owe taxes  

on those funds at some point in the future in is  counting on it they're salivating at the chance to  

grab a large portion of those assets as we learn  in part four of this series a Roth IRA allows for  

tax-free growth tax-free distributions and the  tax-free transfer of those assets to your heirs  

in part five we are talking about conversions a  conversion is where you elect to move your assets  

from your traditional IRA to your Roth IRA you pay  taxes now at the historically low tax rates and  

never are taxed again stick with me and i'll  explain why roth conversions are so important to  

the zero percent tax bracket in retirement and why  the clock is ticking on this tremendous strategy

hey Colin Exelby will be here and i provide  financial planning for business owners and  

their families that just makes sense i own  the financial advisory practice celestial  

wealth management and provide advice  virtually to clients all over the country  

currently anyone no matter their income level has  the opportunity to convert traditional retirement  

accounts into roth accounts that may or may not  still be the case in the future i could easily  

see a scenario where congress puts a cap on the  ability to convert by higher income individuals  

in fact prior to 2010 the magi income threshold  was only a hundred thousand dollars per household  

the bill back better bill if passed  has restrictions on conversions for  

those with higher incomes but those  restrictions don't kick in until 2032.  

that's interesting because by putting  that date into play what it actually  

does is incentivize more smart people to take  advantage of roth conversions which ultimately  

raises the taxes that government is able to have  over the next few years this is a good spot to  

point out important disclosures the information in  this video is for educational purposes this is not  

specific financial planning or investment advice  in addition everyone's tax situation is different  

you should discuss your tax situation  with a qualified tax advisor  

before implementing any planning strategy so  while we are still in these lower tax brackets  

and while conversions are unlimited it may make a  lot of sense to convert assets and pay taxes now  

are you in an artificially low income tax bracket  because you sold your business you semi-retired or  

aren't in between jobs are you under 40 building  your career and still in a low-income bracket  

are you retired but not yet claiming social  security are you over the age of 59 and a half  

but younger than 72 then you my friend  are in the sweet spot for roth conversions  

you pay some tax now but then have tax-free  growth and distribution in retirement  

while building a tax-free legacy for your heirs  in my opinion there is not a better time than now  

to explore how a roth conversion can help your  financial situation well actually there could be  

a better time as i release this video the stock  market is trading just off its record highs  

but if markets were to fall more significantly  it makes the strategy even better you know why  

you can convert assets while markets are down pay  the tax then and then get the growth tax-free on  

the way back up for those who converted in 2020  during the covid pandemic they look like geniuses  

right about now from february to march of  2020 the s p 500 fell roughly 35 percent  

what if at that time you had your ira you  converted the assets while the markets were down  

and then as the market has rallied  back and even beyond where it was  

all of those gains are tax-free all into  the future i mean if you did do that  

kudos to you but that's the type of strategy i'm  talking about and that could be the optimal time  

to do it it's always tough to pay tax now i get  it trust me i want to pay as little as possible  

but if the trade-off is pay a little bit now to  not pay tax in the future i will write that check  

all day long but the real kicker here is  that roth ira distributions don't count as  

provisional income so they can't make your  social security taxable i'll say that again  

roth distributions in retirement do not make your  social security taxable this video series is all  

about creating a tax-free income in retirement  it is possible to create a strategy where you  

either contribute or convert assets to roth iras  pay taxes over the next five years while we have  

these low rates and reposition those assets for  future distribution without tax that is powerful  

you know what else is powerful being able to see  the forest through the trees make sure you hit  

that little like button on the video and smash the  subscribe button hit that little bell so you're  

notified when i release the next video in the  series now most of us will have social security  

income assuming that it's around in retirement  the delay and praise strategy employed by many  

allowed us to build up large pre-tax 401k and  ira balances if you do nothing when you retire  

and take distributions those distributions will  most likely make your social security taxable  

the key to a 100 percent tax-free income and  retirement is to begin positioning yourself now by  

converting assets systematically over time you can  create a roth ira balance that can be withdrawn on  

your terms not the governments without taxes  and without making social security taxable  

so how do you pay the tax on a conversion in  most cases roth conversion tax will need to be  

paid from non-retirement assets let's say you're  40 years old and last year you sold your business  

and are spending this year figuring out what  to do next your income is artificially low  

this year so you decide to convert 150 000 of  your traditional ira to a roth ira if you are  

married and that is your only income this year  you will be squarely in the middle of the 22  

tax bracket you will owe 33 000 of taxes on that  conversion and then never pay tax on that money  

again but you must come up with 33 000 to pay the  tax from non-retirement assets you can only do the  

conversion if you have money to pay the tax that's  generally why it's best to split up conversions  

over multiple years and this is also the biggest  reason why more people don't do conversions it's  

nearsighted if you don't pay the tax bill  now while you're in these low tax brackets  

you and your beneficiaries will most likely pay  even more tax later on all the future growth  

and withdrawals as they push you into higher tax  brackets another point to remember is the five  

year rule if you are under age 59 and a half and  convert assets to a roth ira the assets that are  

converted must be held for five years before any  withdrawals can occur otherwise you are subject  

to a 10 penalty now if you remember from roth iras  in the other videos contributions can be taken out  

without penalty and without taxes these on these  conversions must be held in that roth ira for at  

least five years so when can you pay the tax from  retirement assets well if you're over 59 and a  

half you see at 59 and a half you can withdraw ira  assets without the 10 early withdrawal penalty so  

you could do a conversion and then withdraw more  assets to pay the tax you have to be careful not  

to push yourself into a higher tax bracket though  with the extra withdrawals to pay the tax that's  

why in my opinion the best way to convert  is to pay the tax with non-retirement funds  

in my opinion now is the time to consider  converting your ira assets but conversions  

aren't for everyone when doesn't it make sense  here's a quick rundown of when a roth conversion  

does not make sense first anyone that can't pay  the tax on the conversion because once you convert  

you commit to pay the tax now the second reason  anyone who believes that their future tax rates  

will be lower than their current tax rates the  third reason not to convert is if you have a low  

tolerance for volatility and want the assets to  be in safe low yielding investments generally it  

doesn't make sense to convert assets pay the tax  and then not invest them in growth oriented assets  

the fourth reason is something that i like to call  stealth taxes these are taxes because a conversion  

increases your adjusted gross income and you  could raise your income to a level where you don't  

qualify for certain things like medical deductions  or the irma surcharge on medicare premiums kicks  

in or you lose child tax credits and education  credits or the taxation of social security or  

even the loss of the 20 qbi deduction for business  owners these are all what i call stealth taxes  

and you want to be aware of them but if these are  triggered it's often a one-time short-term expense  

to gain a much bigger benefit in retirement the  next reason you may not want to do a conversion  

if you are applying for financial aid the  increased income from a conversion could impact it  

ira assets are generally excluded from financial  aid assets but the income from a conversion is not  

so you may want to wait until financial aid isn't  needed another reason you wouldn't want to convert  

is if you need the funds soon if you pay tax  now and don't allow the funds time to grow then  

this strategy will backfire conversions are not  for the short term and the last reason that you  

may not want to convert is that generally if you  are over 72 and subject to rmds your conversion  

window may be over the only funds eligible for  conversion would be those above the rmd rmds  

cannot be converted remember rmds are required  minimum distributions notice that as i said this  

i said generally because in certain situations  conversions above the rmd can make sense ideally  

if you have a younger spouse or beneficiaries that  you plan to leave the assets to then converting  

now paying the tax and allowing that tax-free  growth for them may make a lot of sense every  

situation is different so work with your tax and  financial advisors to create your roth plan before  

it's too late and if you're loving all these tax  saving investment strategies make sure to watch  

this video next unlocking the power of the health  savings account triple tax free get clear be clear