3 Reasons to Perform Roth Conversions in 2021, 2022, and Beyond
As individuals navigate the complex landscape of retirement planning, one strategy that continues to gain traction is the Roth IRA conversion. This process involves transferring funds from a traditional retirement account, such as a 401(k) or traditional IRA, to a Roth IRA, which then allows for tax-free growth and withdrawals in retirement. While the decision to convert should always depend on individual circumstances, there are compelling reasons to consider Roth conversions, particularly in the years 2021, 2022, and beyond. Here are three significant motivations for making the switch.
1. Historically Low Tax Rates
One of the most significant influences on the decision to convert is the current state of tax rates. In the wake of the COVID-19 pandemic, the U.S. government passed several relief packages, which resulted in increased federal spending. However, tax rates remain historically low, especially when compared to previous decades.
The Tax Cuts and Jobs Act of 2017 reduced income tax rates across several brackets, and these lower rates are set to expire at the end of 2025. For individuals who anticipate being in a higher tax bracket during retirement, converting to a Roth IRA now could mean paying taxes at a lower rate compared to what they may face in the future. Furthermore, by converting during years with lower-than-usual income—such as after a job loss or during retirement—individuals can optimize their tax situation and potentially minimize their overall tax burden when converting.
2. Tax-Free Growth and Withdrawals
One of the standout benefits of a Roth IRA is its unique tax treatment. Once contributions are made to a Roth IRA, all future growth and qualified withdrawals are tax-free. For younger investors or those with a long investment horizon, this can compound significantly.
By performing a Roth conversion, individuals can lock in today’s lower tax rates, allowing their investments to grow without the looming concern of future tax implications. This can be especially beneficial for those who expect to leave an inheritance or for those planning to use their retirement accounts strategically to supplement income during retirement. By having tax-free income readily available, retirees can manage their tax brackets more effectively and avoid potential tax penalties that come with traditional withdrawals.
3. Estate Planning Advantages
Another compelling reason for considering a Roth conversion is the estate planning benefits associated with Roth IRAs. Unlike traditional IRAs, which require minimum distributions (RMDs) starting at age 72, Roth IRAs do not require distributions during the account holder’s lifetime. This creates an opportunity to pass on wealth more efficiently.
By converting to a Roth IRA, account holders can allow their investments to continue growing without the need to withdraw funds. This not only benefits the account holder but can also provide a tax-free inheritance for heirs. Additionally, if heirs inherit a Roth IRA, they have the ability to stretch distributions over their life expectancy, getting longer to benefit from tax-free growth.
Conclusion
The decision to perform a Roth IRA conversion is a highly individualized one, influenced by current income, tax brackets, financial goals, and retirement plans. As we progress through 2021, 2022, and into the future, the combination of low tax rates, the benefits of tax-free growth, and estate planning advantages should be at the forefront of retirement strategies.
For many individuals, a Roth conversion may present an advantageous opportunity, but it is advisable to consult with a financial advisor or tax professional to evaluate personal circumstances and develop a tailored approach that aligns with long-term financial goals. Such proactive financial planning can result in a more secure and tax-efficient retirement.
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There is only 1 reason to convert. A higher tax % paid when you other wise withdraw. Avg tax rate. Not a higher tax bracket
What about the medicare penalty?! It's huge and permanent.
I came here to see if it would be wise to convert my Traditional IRA money to Roth…i only have around $25k in Traditional and am thinking of converting maybe $5k/year or so, to lessen the tax hit. I’m 47, so if I had it all converted by age 50, i’d still have 10-15 years of compounding growth to enjoy before I’d need it.
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@Safeguard Wealth Management At appx. 33:57 you say that generally, unless you have a large pension, you don’t want to eliminate all tax deferred accounts. At what annual pension amount with Joint-and 100% Survivor Annuity would you consider eliminating TDA’s with a near-max age 70 SS benefit?
Why, your great. Where are you located?
Like it very educational thank you
I am turning 50 this year and for the first time I realize retirement is coming sooner than later (and frankly I am looking forward to it!). The amount of complication in retirement is astounding and I have oblivious since my focus has been on accumulation thusfar. I plan to get up to speed and your videos are very helpful. Thank you!
It’s not Obamacare. It’s Affordable Care.
If you could predict the future with any accuracy you would be rich. Inflation wipes out debt. With the recent 20% to 30% inflation your graph should show GDP grow with inflation as debt remains the same in the future.
Great info Thx. Do you think they will extend the tax cuts or not?
Ely informative, thanks.
You are out of my league. What about the guy that makes under $20 grand a year in Social Security. Good grief, I didn't even know you could get $3,000 a month. It used to be $1800 that my Uncle got. He just put it in the bank. What is the max benefits of SS? Instead of all this nonsense we should be talking about the crime of taxing retirement benefits and the confusion of SS and medicare in our later years. A crime.
Where can i go for resources and/or information if i still don't understand this. I've rewinded several times & i'm still having a hard time.
Ya all want our problems. We hit 32% tax bracket with only rental income. Then the 401ks….I planned based on the rules many years ago, only wages messed with the taxability of SS.
I think you can subtract std deduction from income in calculating IRMAA MAGI.
Regarding fed tax payment on IRA withdrawals I think this is true but not certain. I need to pay at least 80% of a tax liability estimate before the tax deadline and I think you do not need to pay it quarterly just pay it whenever just get it paid before the deadline.
Doesn’t the tax free growth when in the Roth mean we should convert even into a slightly higher bracket?
I'm starting convert to Roth now since the market is down but when the market up Don't have to pay capital gain tax.
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I'm doing conversions I started Jan this year. I plan to pay tax estimates in Dec when I'll have some idea what investment gains if any will be. My estimates will be on the high side for fear of penalties. Is this ok or are you supposed to send tax estimates in immediately after the conversion? My adviser said you can actually wait until tax deadline the following year. I'm paying taxes with separate money from the conversion money.
We are going to start taking IRA distribution at 59 .5 then the wife will take SS at 62 y/o early due to cancer. Based on our taxation spreadsheet for NJ my Pension is $67000 SS $24000 & $35000 Ira still our effective tax is 10.2 % & marginal tax 22% I think the average couple doesn't need Roth conversion.
Roth conversions may not pay off until age 90 for most. Tax-rate changes have minimal effect on the financial benefits of Roth conversions, Edward McQuarrie, professor emeritus at Santa Clara University, wrote in a recent paper. The most important factor is actually compounding.
Only in the unlikely scenario that someone is in the 0% tax bracket is it justifiable to recommend a conversion based on higher tax rates in the future, McQuarrie noted. And unless a couple’s peak wage earnings are above $200,000 or for some reason they haven’t saved much for retirement, they will most likely be in a low tax bracket when taking required minimum distributions, according to the study.
“[U]nless both members of a sixty-something couple are 401(k) millionaires, their tax rate in retirement will likely be 12%,” McQuarrie wrote in the paper. “They will have last seen tax rates that low when they were students.”
In most cases, “the benefits from a Roth conversion are often small and slow to arrive,” past age 90, “and so long as annual distributions from converted amounts are not taken,” he wrote.
Additionally, there is no benefit to a Roth conversion for the sake of tax diversification, he said. https://www.investmentnews.com/roth-conversion-study-207591
My pension is 172,000 per year, and 250,000 in a tax deferred account , I am 70 years old, should I convert to Roth now?
I will be soon 50 and I am contributing to Roth 401K and Roth IRA (via backdoor conversion) even though my tax rate in future might be lower than today. The way I look at it, I would rather pay taxes now even if I am probably paying at a higher tax rate and continue to build on Roth retirement nest egg.
The first chart you show looks like a $50,000 IRA account that somehow has $75,000 RMD's in only a few years. That doesn't make sense, and at the end of the time period, over $300,000 RMDs per year. How is that mathematically even possible?
Do you have an updated chart on the “Annual Opportunities”’? I’m thinking that when the Fed decides to finally stop QE and raise the interest rate in March, 2022 – it will probably exceed any opportunity we’ve had in the past 14 years (2008) to do a Roth Conversion. Any chance you might update that chart?
Pandemic killed more people than WWI and WWII combined. So debt spending makes sense.
Contributing to a 401K rather than a Roth IRA while working has an additional disadvantage I have not seen previously discussed, namely a reduction in the SS taxes you pay each year will impact how much you eventually receive when you apply for SS.
I just now discovered and watched your presentation, this is very well done and make a lot of sense, thank you for sharing this. I have a question related to Roth conversion. My question is not on the mechanics converting from traditional IRA, but rather on the risk of "pre-paying" taxes by converting. I know that under current law that tax rates will go up to the prior rate, but is there any concern about Congress creating new laws that change the taxability of Roth distributions? Is there any expectation that Congress could invent some type of "excess Roth Distribution Tax" and thereby make some of a Roth distribution taxable? If would be infuriating if a taxpayer opted to endure significant financial hardship in the present to be able to pay taxes on a Roth conversion, only to see the laws changed such that in the future some of those Roth conversion distributions get taxed again? This may sound crazy and completely unfair, but I think the the FICA withholding taxes on wage income is what funds Social Security payments, which are often 85 taxable. In other words, we pay taxes into Social Security while working and we pay taxes again on those dollars when we receive Social Security.
Can my military retirement & Social Security monthly incomes be used to fund a ROTH? They are both after tax incomes.
I applied for medical insurance through New York’s market place. As I am unemployed, I plan on doing Roth conversions and estimated my conversion to be about $20,000 for 2022. I expect no other income. New York State wants to put me in Medicaid because they say the Roth conversion does not qualify as income for the purposes of getting medical insurance through there marketplace. Any other New Yorkers have the same problem?
Wow. What a wonderful video explaining the different scenarios. Could you explain how to pay taxes on conversion of Roth funds if one is under 59.5 and not wait until tax filing date of next year (in order to ovoid underpayment penalty)?
Three reasons to Perform Roth Conversion : REQUIRED MINIMUM DISTRIBUTION.
1. Reason not to convert. The government can change the tax law and penalize you more. So you take the hit to convert. Then when it’s time to pull your money out they hit you with higher taxes, to steal more of your money.
Can retired convert?
Sub'd! Well done. Your ability to "peel the onion" utilizing actual numbers makes this the best evaluation on the topic I've seen on YouTube.
Just retired. Appreciated the helpful info. Also lets wipe out those created/ing national debt
This is the best summary and explanation of all the post retirement traps I have ever seen. Thank you.
There is simply no way that a Roth conversion makes sense for everyone. A much better video would have given income and IRA examples and played each out. This was just confusing, and I consider myself saavy. I have close to 5 million in combined IRAs and am 66. Any meaningful conversion takes me from my current 15% (18.9%) marginal to 40.8%. Taking RMDs at72 should be in the mid 200s or 24% marginal. I’m already maxed on Irma’s.
An increase in taxable income, like a Roth conversion, can also affect other income based taxes and expenses for that year. For example, the stimulus payments in 2021 – thousands of dollars could have been lost. Also medical premium subsidies from ACA, Medicare premiums that are income based, tax surcharges on high high income, both state and federal. This can add up to tens of thousands of dollars over and above the tax paid on the conversion.
Wouldn’t another benefit of conversion be that by paying the taxes out of pocket it allows you to essentially increase the amount of funds you are contributing to retirement in tax advantage accounts once you’ve maxed out all other taxed advantage options?
I disagree that a lower rate today is the best and only reason to convert. The real benefit is tax free growth from now for the next 30-40 years. I’m 54 so 25 to 35 years is a realistic time frame for additional tax free growth. Paying a higher rate today and no tax in the future beats a lower rate at 70 or 80 years old. Is my math wrong here?
Excellent information! Thank you. Just subscribed.
The way to lower your tax burden is very simple. Throttle your AGI and use real estate passive paper loss to convert standard IRA to Roth. I do this every year about $50K to $100K. I try to take at least a $50K loss with refie, depreciation, maintenance and cost segregation. The IRS has many safe harbors for investors and screws the W-2 crowd.
so the years after you retire from a high income job might a good time?