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The Roth Conversion MISTAKE Every Retiree Should Avoid · Retirement Answers

• 0:00
  Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host, as always. Today on the show, I want to talk about the Roth conversion mistake that every retiree should avoid. And this is going be an interesting one because Roth conversions are a hot topic.
• 0:16
  We all talk about them and I'm one of those people that says, yeah, Roth conversions can very much be helpful in your tax planning overall throughout your lifetime. And you can save a bunch of taxes if you decide to do them up to certain tax brackets and kind of plan it all out. And so that's absolutely true. We can definitely save money on taxes in retirement by having a Roth conversion strategy if it applies to you. But the mistake that I want to talk about today and explain why this could be a mistake is if you convert everything to Roth, because sometimes people come to me and they say, Jacob, should I just go ahead and convert all my $1,000,000 or $500,000 I have in tax deferred accounts over to Roth and just be done with taxes forever?
• 0:53
  Is that a good thing? And the first thought we have there is, yeah, to have everything in Roth, that's the best option, right? Because then we have no taxes the rest of our lives. Our spouses don't have to worry about the widow's tax trap. We are heirs or our kids, guess what?
• 1:06
  They don't have any tax issues because they can receive those Roths tax free whenever they get that after I pass away. There's so many benefits, right? Like that's a no brainer. And at first glance, yes, that does make sense. But on paper and mathematically, I'm about to show you why that is not the best option.
• 1:22
  And in fact, you'd probably be leaving a little bit of money on the table and paying for taxes on things that you otherwise would never have had to pay taxes in the first place. So let's break this down. The first thing I want to remind you of here is that everyone gets a standard deduction, whether you're single or married filing jointly. Here in 2025, that standard deduction for married filing jointly folks is 31,500 if you're under 65. If you're single and under 65, it is 15,750.
• 1:48
  And if you're above 65 and you're single, so you're single or head of household, you actually get a $2,000 additional deduction on top of your standard by being over 65 or if you're blind. And also if you're married, each spouse gets an additional $1,600 deduction for being 65 or older or blind. So $3,200 for each married filing jointly couple. So you get these additional deductions, but now under the new One Big Beautiful bill tax code that's been implemented here mid year in 2025, if you're over 65 and you're under a certain amount of money, I'm not gonna go through the details of this because that's a whole episode I've done separately anyway, but you could get additional $12,000 per married filing jointly couple or $6,000 per person. Also, you're single, you could get it up to $6,000 deduction as well on top of the standard plus being over 65 the normal, and then also this additional one, but that additional one only lasts for four years until they re up it.
• 2:40
  So at the end of the day, if we just kind of did some quick math on this, if you're 65 or older, both of you, let's say you're married filing jointly, if you're both 65 or older, by the end of this year, here in 2025, your standard deductions could end up being $46,700 married filing jointly. And if you're single, your standard deductions could end up being 23,750 here in 2025. Obviously, year, these standard deductions inflate just a little bit to accommodate inflation. But that's the first thing I wanna point out is you have what I call the 0% tax bracket. Every dollar that falls within that standard deduction, however you got there, whether it be taxable social security amount, whether it be income from a job, whether it be IRA distributions or pension income, every dollar that falls within that standard deduction is completely tax free.
• 3:29
  Okay, so here's the thing I want to tell you, and this is the main point of the conversation today, and I'll explain why this matters as you get later into retirement, as you get the RMD age and have social security and things like that, is you want to have that filled up every single year. So it would be foolish not to fill up your standard deduction every year. Now, Jacob, how's that even possible? How could I even do that? Well, if you think about, like we're talking about here today, we're talking about having everything in a Roth IRA.
• 3:56
  If you have all your money in a Roth IRA, maybe have some in a brokerage account or the bank, and maybe have some social security, your taxable income is gonna be zero, pretty much zero because you have no money to take out of an IRA, which would be taxable as income. Your Roth distributions are tax free. All of your interest on your brokerage account, assuming it's not, you know, $5,000,000, all that's gonna be completely tax free. And then whenever you think about, you know, your social security, which I've talked about before, you know, whenever you have only social security and very minimal other income coming in, all of your social security benefits, at least under current tax code, are they're not gonna be taxable at all. So when you have income from social security and you don't have a pension, let's say you don't have any IRA distributions and you only are living off Roth and maybe some brokerage account or cash distributions, you could be paying no taxes every single year.
• 4:44
  But here's the catch, you're also still not using up that standard deduction because you don't have enough income to use it. So here's what I wanna, the point I wanna make. If you're doing Roth conversions, and you're trying to convert down either to zero or a certain number within your accounts, what I want you to focus on is, is I don't want you to think I need to have everything in Roth because that's the best thing ever. What I want you to know is you want to be able to use your standard deduction, whether single or married filing jointly every single year. So you want to have at least enough money in that tax deferred source that you could take out up to that standard deduction, right?
• 5:18
  And pay no taxes on it because that's a 0% bracket. So here's the benefit of doing it that way. Whenever you put the money into your tax deferred four zero one ks or the tax deferred IRA while you were working, you got to take a tax deduction on the front end by doing that. So you didn't pay taxes on the front end, that money grew tax deferred and tax sheltered over the time it was invested. Now you get to this point later in life and you can take this money out presumably at the 0% rate due to your standard deduction, which is fairly high.
• 5:45
  So you paid no taxes on the front end and perhaps you're going pay no tax on the back end. That is the best case scenario, right? That's better than a Roth, because on a Roth, had to pay the taxes on the front end to even get the money into the account. Yes, you get tax free or tax deferred growth and then tax free distributions on the Roth in the future, but it's still missing that element of the tax deduction on the front end. So all that to say, whenever you get down the road and let's say you've got, you know, some Roth conversions to do in your 60s and you're trying to figure out, do I go to zero on this tax deferred IRA, or do I leave some money left over in it?
• 6:18
  What I would encourage you to do is plan ahead here. And I would say, what is your social security gonna be whenever you're 75 or you're 80? And you can kinda, you know, put an inflation number on this, call it 2%, two and a half or 3%, just kinda estimate as best you can based on what you're getting now, or what you would be getting in the future. What would your inflation adjusted social security benefits be on maybe the high end in the future? That's maybe a good way to actually plan this out.
• 6:43
  What would they be on the high end if you shot a little bit high? Figure out what that number is, whether you're single or married. And then I want you to say, okay, based on the current tax code, and maybe adjusting that standard deduction as well over time, how much room would I still have in my tax brackets in the future of that standard deduction, if I had an IRA distribution or an IRA that had an RMD on it? Because once you get to 73 or 75, you're forced to start taking these distributions out because of required minimum distributions. So if you can kind of plan out and say, hey, I want my RMD to be 10,000 or 15,000 or 30,000 or whatever, based on your other expected taxable income in the future, that's where you're getting down to like really good planning here.
• 7:26
  You can say, hey, I'm gonna have this much social security benefit. Here's how much I think is gonna be taxable based on my RMD amounts that I'm projecting. I need to have, you know, 300,000 in IRA once I get to 75, or I need to have 400,000 in IRA once I get to 75. Based on that, my RMD would be X amount of dollars and based on these expected standard deductions, if everything stayed the same, and obviously that's written in pencil, so we don't know, we're just planning based on what we have today. We could say, oh, I'm going to have social security, right?
• 7:54
  I'm also going to have this IRA distribution because of my RMD. That RMD could be tax free if it's less than the total standard deduction. But remember, if you've got a $20,000 RMD, and you're making, I don't know, $60 total all in, let's assume you're married filing jointly, you're making $60 all in as a social security benefit combined, your total gross gross income is $80,000 in that scenario. But you have to do a little bit of math here. I'm not gonna go through it because I've done in other episodes, but that $60,000 of social security at most 85% of that is even taxable.
• 8:28
  But because you only have $20,000 of other taxable income due to your RMD, you're not gonna be paying tax on very much, if any of that social security. And there's a math equation to figure out how much income can I have without ever making any of my social security taxable? Because if you can figure that number out, which that's what we do with our clients and kind of plan ahead. If you can figure that number out, then you're in a spot where your social security is still tax free, then your RMD is tax free, and you're using your standard deduction to eliminate the taxes essentially on both of those things. So the point I wanna make here today is that it's actually helpful and actually tax efficient to have some money always in a tax deferred account.
• 9:10
  Because of the standard deduction, because of how social security taxation works, you can work the system and work things to your advantage to actually pay no taxes on the front end on your IRA whenever you contributed the money while you were working, you took a deduction then, and also pay no taxes on the back end whenever you take the money out. Now, in my opinion, that's next level planning. So this goes back to, you know, the question, should I have everything in Roth? Should I convert everything over to Roth? And the answer is no, it's actually inefficient because then you would be paying taxes at some point by doing the Roth conversions, you'd be paying taxes on money that you otherwise would have never had to pay taxes on at all if you had planned a little bit better or thought about these types of things.
• 9:53
  So there's a lot that goes that, and you know, obviously we're making a few different assumptions here, and your situation might not track this exactly or be exactly the same, but I want you to just think about it and evaluate it for you. What if you need to do Roth conversions, maybe that's the right answer, but how many Roth conversions? How much should you convert of your current balance over to Roth? And how much should you leave behind in that tax deferred account, so you can use your standard deductions effectively at that 0% rate? Anyway, that's what I wanted to talk to you about today.
• 10:21
  I hope it kinda sparks an idea or spark some questions, maybe reevaluates your plan. Now, here's what I want to say finally, if you're someone who's like, Hey, that's interesting, never thought of it that way. I'm curious if that applies to me. Great, you can book a call. There's a link down in the description below where you can schedule something with me, hear more about what we offer and the services we help our clients with.
• 10:40
  And finally, if you're wanting a copy of the important numbers data sheet that I use all the time, the one I'm reading right now is I'm talking about these standard deductions that has all the important numbers and factors and ranges tables on it. If you want that, you can click the link down in the description below as well, and actually grab a free copy, just have to enter your name and email and I'll send it straight over to you automatically. It's super easy. So I hope this has been helpful. Let me know your thoughts if you have any or shoot a question over via email.
• 11:05
  Happy to converse with you and have a conversation. Other than that, I hope you have a great rest of your day. We'll talk to you very soon. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.
• 11:23
  Thanks for tuning into this week's episode. I look forward to talking with you again next week.