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Should I Do A Roth Conversion When The Market Is UP or When The Market Is DOWN? - YouTube
Channel: Oak Harvest Financial Group
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so when should you do a roth conversion
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we do tons of tax planning videos on
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this channel for your retirement to help
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you make better decisions but should you
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be doing your roth conversions when the
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market is up at the end of the year
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typically like most people do or should
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you consider doing them throughout the
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year especially when the market is down
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[Music]
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hi i'm troy sharp ceo of oak harvest
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financial group certified financial
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planner professional a certified tax
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specialist and also hosts the retirement
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income show that you can hear right here
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on youtube so we introduced this concept
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several years ago to clients about when
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we do roth conversions and why we do the
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roth conversions at that time today i'm
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going to walk you through the simple
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math and then the concepts behind it so
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you can decide if it makes sense for
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your retirement as well if you want to
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make better decisions with money if you
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want to learn more about investing taxes
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all of these topics hit that subscribe
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button we're going to do just that for
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you it takes a second and doesn't cost
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you anything all right we're going to
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start by showing you two different
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portfolios here one on the left assumes
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this is the value of your ira at the end
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of the year
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to keep it uniform we're looking at a
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million dollar portfolio and assuming
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that everything in theirs is simply
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valued at a hundred dollars per share
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that means we have ten thousand shares
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of stock at a hundred dollars per share
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which equals one million dollars
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over here on this side we have the same
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portfolio but this is showing in a year
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kind of like right now where the market
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is down
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which we expect long-term capital
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markets to go up so mid-year or earlier
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at some point during the 12-month cycle
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the portfolio is down
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so when we talk about stock ownership
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investing in the markets we asked
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clients to believe a couple of things
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first and foremost that capital markets
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work that long term we expect capital
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markets to be worth more or the
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securities within capital markets to be
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worth more than they are today and then
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number two
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whatever stocks we own whatever risk
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investments that we own we have to
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understand that one they need to be part
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of a plan
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but two they are just tools to help
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accomplish the goals that that plan has
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set out to do now when you own stock
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it's important to look at the stock you
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own as an asset try to dissociate
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yourself away from just the value of the
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portfolio look at yourself as an owner
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you have a right to the property you
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have a right to the profits you have a
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right to the assets of that company you
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are an owner when you invest in publicly
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traded equities so
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when we look at it from that side yes
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the portfolio value is worth a million
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but truth of the matter is we own 10 000
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shares of those companies so don't look
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at it as a value if you look at it as an
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ownership
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from a share ownership perspective
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first and foremost that's going to help
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you withstand the ups and downs in the
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market much much more easily but number
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two it helps to understand this concept
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of why we would recommend we do roth
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conversions in
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times when the market is down as opposed
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to at the end of the year just going and
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doing it in november or december
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so we're owners of companies we have the
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rights to the assets of the companies we
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own within our portfolio
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ten thousand shares ten thousand shares
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even though the value is down
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we still own ten thousand shares so what
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happens when the market goes down do you
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lose any shares of the companies that
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you own no of course not just
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temporarily the value the fair market
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value of your slice of those companies
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has decreased in value but you still own
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the shares so that's what i mean when i
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say
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this is the portfolio at the end of the
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year because the portfolio has now
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rebounded and typically this is when
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either if you're doing it yourself or if
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you're working with a financial advisor
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if the financial advisor is having these
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conversations with you typically this is
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when most people are going to do their
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roth conversions and i think it's a
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missed opportunity and this is why we do
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it this way with our clients
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here is let's say it's may of of the
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year so mid-year
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portfolio has gone down in value we
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still have ten thousand shares but the
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current market value is eight hundred
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thousand dollars estimated at eighty
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dollars per share so assuming our income
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and tax plan calls for a hundred
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thousand dollar conversion i'm going to
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look at both scenarios and do a
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comparison to help you understand the
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difference between the timing of roth
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conversions can have on the portfolio
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today and also long term
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so a hundred thousand dollar conversion
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if you're new to the youtube channel and
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you haven't seen some of our roth
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conversion videos when it comes to
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personal retirement planning the impact
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they can have on your income and taxes
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over the course of retirement there's
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some of the most powerful and
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educational videos i believe out here on
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youtube when it comes to retirement
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planning so i strongly encourage you
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after this video to go watch them so you
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can understand long term have context to
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how these decisions today can help
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improve retirement over the long haul
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and i'm talking hundreds of thousands of
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dollars in many scenarios of potential
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taxes saved so when we put together an
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income plan and a tax plan for clients
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oftentimes we're looking at roth
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conversions because we want to look at
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taxes long term so depending on how much
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income you have your other investments
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any rental property social security
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pensions all of these aspects they
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affect the tax plan because it
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determines they determine where we are
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in our tax brackets so if we've put this
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plan together and it calls for the
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client to do a hundred thousand dollar
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conversions sometimes it might be for
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two or three years other times it might
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be for four or five or six heck even the
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conversions the dollar amount of the
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conversions maybe a hundred thousand for
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one two three years and then a reduction
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to 80 70 60. everyone's plan is
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customized and everything is different
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for your situation but i want to keep
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this simple for purposes of this video
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and assume we're just doing a hundred
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thousand dollar conversion because that
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is what the plan calls for
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so we have two choices we can wait until
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the end of the year to do the conversion
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or we can take advantage of the market
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drops and do it now
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so in this example
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if we do the hundred thousand dollar
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conversion the ira the end of the year
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drops to nine hundred thousand because
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we've moved a hundred thousand dollars
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over to the roth pretty simple math here
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we have 9 000 shares left in the ira
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we've moved a thousand dollars over
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excuse me we've moved a thousand shares
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over because they're valued at 100 per
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share in this example so
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end result we have a hundred thousand in
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the roth we have 900 000 in the ira
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this is the breakdown of shares amongst
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the accounts the tax bill for both of
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these situations is the same because
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we've targeted a hundred thousand dollar
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conversion amount but in this example if
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we take advantage of the pullback in the
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market mid-year
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remember went from a million to 800 000
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we're still targeting that hundred
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thousand dollar conversion so after we
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do the conversion we'll have 100 grand
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in the roth same as over here 700 grand
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in the ira because of the market drop
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but here is the big difference we've
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been able to move because the price per
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share is lower because the market has
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come down we're able to move more shares
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into the roth so in this example we have
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1 250 shares
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as opposed to 1 000 in the roth and
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we're left with 8 750 as opposed to 9
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000 in the ira now why is this important
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getting this extra 250 shares into the
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roth
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remember we ask you to believe that
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long-term markets go up so we do believe
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that long-term these shares are going to
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be worth more but we got 250 more shares
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in here and essentially did not have to
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pay tax on them because if we waited to
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the end of the year
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and did the conversion of a hundred
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thousand we only get a thousand shares
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inside the roth whereas if we were more
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proactive with our tax planning and we
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did it
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we took advantage of the opportunity
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when the market was down we're able to
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pay the same cost that hundred thousand
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dollar tax bill for the conversion but
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we're able to get more shares over here
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and if we believe long term the markets
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will be higher than this 250 shares when
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it rebounds back up to 100 per share
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that's an extra 25 000
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inside the roth
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that which again essentially we didn't
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have to pay taxes on now we do have to
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pay taxes on the hundred thousand but
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you get my point now here's the part
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that i think a lot of people overlook
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and it's really twofold first and
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foremost i'm a finance guy i'm not just
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looking at the power of the decisions
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that we make today i'm considering with
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everything that we do for clients what
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is the power of those decisions over
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time the power of those decisions that
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we make today what is the power and the
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value over time this is called the time
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value of money
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an extra 250 shares once the market
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rebounds and our portfolio gets up to
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its previous levels
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we just said that that's about 25
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dollars
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if we compound that that additional
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money in the roth at seven percent over
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the next twenty years that's actually a
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hundred thousand dollars in value
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so we've actually gotten a hundred
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thousand dollars more into the roth over
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time assuming the seven percent rate of
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return and again theoretically we really
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didn't have to pay tax on this money
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because we simply did the conversion at
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the in the middle of the year as opposed
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to the end of the year now the two-fold
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part here is not only do we have a
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higher value than what we actually got
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into the portfolio today when we're
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looking at the time value of this
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decision but we also we have less money
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inside the ira and if you're a follower
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of this channel or this is why i told
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you to go watch some of these other roth
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conversion videos if you're a first time
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viewer here
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is we've gotten essentially this hundred
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thousand dollars that would have been in
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the ira
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we've got it into the roth so what does
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that mean we have a less ballooned ira
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down the road which means our required
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minimum distributions are going to be
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lower and almost certainly our income
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taxes later are going to be lower so not
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only do we have
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the benefit today but we get the benefit
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down the road with respect to our ira
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and income taxes with regard to required
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minimum distributions so all around i
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think this is a much better strategy
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than just waiting until the end of the
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year to do your conversions so is it
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better to do your conversions when the
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market is up or when the market is down
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well i believe it's better to do them
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when the market is down comment down
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below let me know what you think of
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course subscribe to the channel our goal
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is to keep you more connected to your
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money and we do that by you staying more
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connected to us like the video and we
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look forward to seeing you on the next
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one
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[Music]
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i
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