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Roth Conversions With $1.5 Million in Pre-Tax Accounts: When the Window Opens and Closes · Align Your Retirement

• 0:00
  SPEAKER_00: Most women in their 50s with a million dollars or more in a 401k or traditional IRA believe they've already done the hard work.
• 0:07
  SPEAKER_00: You maxed it out year after year, you didn't touch it in 2008, you didn't touch it in 2020, you kept contributing when it hurt.
• 0:15
  SPEAKER_00: And you're right, that was hard work.
• 0:18
  SPEAKER_00: But the hard work is not over.
• 0:20
  SPEAKER_00: The hard work that's actually still in front of you is a tax planning decision almost nobody talks about in the accumulation phase.
• 0:28
  SPEAKER_00: And it's a decision with a window, a real closing window with a start date and an end date that the IRS wrote into the tax code.
• 0:36
  SPEAKER_00: That window is called the Roth Conversion Window.
• 0:39
  SPEAKER_00: For most women, in your position, it starts somewhere in your mid-50s and it closes at age 73.
• 0:45
  SPEAKER_00: The year required minimum distributions begin.
• 0:48
  SPEAKER_00: And what you do inside that window, or more accurately, what you don't do, determines whether you pay taxes on your retirement at a blended 22 to 24% for the rest of your life, or whether you pay them at 32, 35, or even maybe 37% starting the year you hit 73 and every year after.
• 1:10
  SPEAKER_00: Welcome to Align Your Retirement.
• 1:12
  SPEAKER_00: I'm Hazel Secko, CFP CDFA, and the founder of Align Financial Solutions, a fee-only fiduciary firm built for women approaching retirement.
• 1:25
  SPEAKER_00: So today I'm gonna walk you through three things.
• 1:28
  SPEAKER_00: One, why this window exists structurally and why this is uniquely available to you, specifically.
• 1:35
  SPEAKER_00: The women who accumulated well in her working years.
• 1:39
  SPEAKER_00: Two, the three questions that tell you whether a Roth conversion belongs on your calendar this year or next year or never.
• 1:47
  SPEAKER_00: Three, the three mistakes I see women in your exact position make with Roth conversions.
• 1:54
  SPEAKER_00: Mistakes that turn a smart decision into an expensive one.
• 1:57
  SPEAKER_00: Let's get into it.
• 1:58
  SPEAKER_00: Quick note on who this episode is for.
• 2:01
  SPEAKER_00: If you're a woman in your 40s or 50s, you've done a lot right with your money.
• 2:06
  SPEAKER_00: You have a million dollars or more in pre-tax retirement accounts, that's your 401k, 403B, your traditional IRA, possibly an inherited IRA.
• 2:16
  SPEAKER_00: And you're somewhere between five and 15 years from the retirement date you actually want.
• 2:21
  SPEAKER_00: This episode is for you.
• 2:23
  SPEAKER_00: If you're in your 30s or your retirement account or mostly Roth already, or your income is still at a level where conversions don't mathematically work, this episode is still useful, but the urgency is different.
• 2:34
  SPEAKER_00: Follow it for later.
• 2:35
  SPEAKER_00: For everyone else, stay with me.
• 2:37
  SPEAKER_00: This is the one.
• 2:38
  SPEAKER_00: Here's the structural picture.
• 2:41
  SPEAKER_00: When you're working 40s into your early 50s, you're in or near peak earning years.
• 2:47
  SPEAKER_00: Your tax bracket is high.
• 2:49
  SPEAKER_00: Converting money from pre-tax to Roth in that window means you pay tax on the conversion at your working year marginal rate, which for most women in my client base is somewhere between 32 and 37% federal plus tax.
• 3:01
  SPEAKER_00: That's expensive.
• 3:03
  SPEAKER_00: You rarely want to convert while you're still earning at full throttle.
• 3:07
  SPEAKER_00: When you're 73 and beyond, the IRS takes the decision out of your hands.
• 3:12
  SPEAKER_00: That's when required minimum distributions kick in.
• 3:15
  SPEAKER_00: The IRS forces you to pull a specific percentage of your pre-tax account out every year, and you pay ordinary income tax on every dollar of it.
• 3:25
  SPEAKER_00: At$2 million in pre-tax, your first RMD at age 73 is roughly$75,000.
• 3:32
  SPEAKER_00: At$3 million, roughly$113,000.
• 3:36
  SPEAKER_00: That's on top of your Social Security, any pension, any other income.
• 3:41
  SPEAKER_00: Those RMDs push your taxable income into brackets you didn't see coming.
• 3:46
  SPEAKER_00: And they only grow every year after.
• 3:48
  SPEAKER_00: That's the picture at both ends.
• 3:51
  SPEAKER_00: Now, look at what's in the middle.
• 3:53
  SPEAKER_00: The years from the day you stop working, whether that's 55, 58, 62, whenever you actually pull the plug, to the year you turn 73, that's the window.
• 4:03
  SPEAKER_00: For a woman who retires at 60, that is 13-year window.
• 4:09
  SPEAKER_00: For a woman who retires at 55, it's an 18-year window.
• 4:13
  SPEAKER_00: In those years, three things are true simultaneously.
• 4:17
  SPEAKER_00: One, you've stopped earning W-2 income, so your tax bracket just dropped, sometimes by two or three full brackets.
• 4:25
  SPEAKER_00: Two, you haven't started Social Security yet, or you've started it at a smaller amount.
• 4:30
  SPEAKER_00: So your taxable income is the lowest it's been since your 20s.
• 4:34
  SPEAKER_00: Three, RMDs haven't started, so the IRS isn't forcing money out of your accounts.
• 4:40
  SPEAKER_00: That's the gold decade.
• 4:42
  SPEAKER_00: That's the only time in your adult life when you have a large pool of pre-tax money sitting there and you're temporarily in a low tax bracket and nothing is forcing your hand.
• 4:53
  SPEAKER_00: A Roth conversion is the act of deliberately pulling money out of your pre-tax account during that low bracket window, paying the tax on it today at that lower rate, and moving it to a Roth IRA where it grows tax-free for the rest of your life.
• 5:10
  SPEAKER_00: Here's the piece most women miss the conversion isn't about getting rich faster, it's about not handing the IRS a bigger check later than they could have forced out of you now.
• 5:22
  SPEAKER_00: If you don't do conversions in that window, here's what mathematically happens.
• 5:26
  SPEAKER_00: Your pre-tax accounts keep compounding by the time you're 73.
• 5:31
  SPEAKER_00: A$2 million pre-tax balance could easily be three and a half or even$4 million.
• 5:37
  SPEAKER_00: Your RDs are calculated on that bigger number, which means your taxable income at$73 is higher than it would have been, which pushes you into a higher bracket.
• 5:48
  SPEAKER_00: Which, and this is the part that really hurts, can push your Medicare premiums up through something called IRMA and can push 85% of your Social Security into taxable income and can force you to realize capital gains at higher rate.
• 6:04
  SPEAKER_00: It cascades.
• 6:05
  SPEAKER_00: The window is the one chance you have to interrupt the cascade before it starts.
• 6:10
  SPEAKER_00: The window is the one chance you have to interrupt that cascade before it starts.
• 6:16
  SPEAKER_00: Not every woman in that window should do conversions.
• 6:19
  SPEAKER_00: Some should do them aggressively, some should do them modestly, a few should not do them at all.
• 6:25
  SPEAKER_00: Here are the three questions that tell you which one you are.
• 6:28
  SPEAKER_00: Question one.
• 6:36
  SPEAKER_00: It's not hard math, it's arithmetic, but it requires honesty.
• 6:40
  SPEAKER_00: If your current marginal bracket is 24% and your projected bracket at age 73, once RMDs, Social Security, and pension are all stacked is 32% or higher.
• 6:52
  SPEAKER_00: A conversion is mathematically accurative.
• 6:55
  SPEAKER_00: You're paying tax now at a lower rate than the rate you'd be forced to pay later.
• 7:01
  SPEAKER_00: If your current bracket is 32% and your projected bracket at 73% is 24%, which happens if you're still in peak earning years and your retirement income stack will actually be modest.
• 7:14
  SPEAKER_00: Conversion is not the move.
• 7:16
  SPEAKER_00: You'd be paying more tax now than you'd pay later.
• 7:19
  SPEAKER_00: The mistake most people make is assuming I'll be in a lower bracket in retirement.
• 7:24
  SPEAKER_00: For a woman with$1.5 million or more in pre-tax accounts, that assumption is usually wrong.
• 7:31
  SPEAKER_00: RMDs at that account size typically lift your bracket in retirement.
• 7:35
  SPEAKER_00: They don't lower it.
• 7:36
  SPEAKER_00: Question two: who inherits this money?
• 7:39
  SPEAKER_00: If your kids will inherit your IRA, here's what the Secure Act did in 2020.
• 7:46
  SPEAKER_00: They have 10 years to pull it all out.
• 7:49
  SPEAKER_00: 10 years.
• 7:50
  SPEAKER_00: Which means those 10 years typically overlap with your kids' peak earning years.
• 7:55
  SPEAKER_00: Their 40s and 50s, when they're in the highest brackets of their working lives.
• 8:00
  SPEAKER_00: So uh$2 million traditional IRA inherited by a daughter in her late 40s, who's already in the 32% bracket, is not 2 million to her.
• 8:11
  SPEAKER_00: It's$2 million spread across 10 years of forced distributions taxed at her bracket, which means she effectively receives something closer to$1.3 to$1.4 million after tax.
• 8:24
  SPEAKER_00: If you convert that IRA to Roth during your gold decade window, paying tax at your lower bracket, your daughter inherits a Roth IRA.
• 8:35
  SPEAKER_00: She still has to pull it out in 10 years, but every dollar she pulls out is tax-free.
• 8:41
  SPEAKER_00: The inheritance math can move the needle even for women who on their own are borderline on whether to convert.
• 8:48
  SPEAKER_00: Question three, do you have cash outside of retirement accounts to pay the conversion tax?
• 8:53
  SPEAKER_00: This is the hidden question.
• 8:55
  SPEAKER_00: When you do a Roth conversion, you owe federal and state income tax on the amount converted.
• 9:01
  SPEAKER_00: And it's due the April after the conversion year.
• 9:04
  SPEAKER_00: If you pay that tax from the IRA itself by withholding a chunk of conversion to cover the tax, you've just shrunk the amount that actually makes it into the Roth and you've broken most of the math.
• 9:16
  SPEAKER_00: A Roth conversion only works cleanly if you can pay the tax from a taxable brokerage account, a money market, a savings account, money that's already been taxed.
• 9:25
  SPEAKER_00: If you don't have that cash outside of retirement, the answer isn't don't convert.
• 9:30
  SPEAKER_00: The answer is convert smaller amounts over more years and rebuild a taxable cushion alongside it.
• 9:37
  SPEAKER_00: That's a planning conversation, not a one-time decision.
• 9:40
  SPEAKER_00: Most women I work with get to pillar two and say, okay, I can do the math.
• 9:46
  SPEAKER_00: I'm in.
• 9:46
  SPEAKER_00: Let's convert.
• 9:47
  SPEAKER_00: That's where the mistakes start.
• 9:49
  SPEAKER_00: So mistake number one, converting too much in one year.
• 9:53
  SPEAKER_00: This is the most common one.
• 9:54
  SPEAKER_00: A woman sees the window, gets excited, and converts$500,000 in a single year.
• 10:00
  SPEAKER_00: That$500,000 gets added on top of any other income she has that year.
• 10:06
  SPEAKER_00: Lift her into the top bracket, lift her Medicare premiums through Irma, sometimes two years, because Irma looks back at a two-year-old tax return.
• 10:16
  SPEAKER_00: Can phase her out of certain deductions.
• 10:18
  SPEAKER_00: The cleaner move is almost always to convert an amount that fills up to a specific bracket, not one that spills into the next one.
• 10:28
  SPEAKER_00: For most women in my client base, that means converting the amount that takes her to the top of the 24% bracket and stops every year for 10 to 15 years.
• 10:38
  SPEAKER_00: Steady, deliberate, inside the bracket.
• 10:41
  SPEAKER_00: That's not as exciting, but it's more effective.
• 10:44
  SPEAKER_00: Mistake number two, ignoring Medicare IRMA.
• 10:47
  SPEAKER_00: IRMA stands for income-related monthly adjustment amount.
• 10:50
  SPEAKER_00: It's a surcharge on your Medicare Part B and Part D premiums that kicks in when your modified adjusted gross income goes above certain thresholds.
• 11:00
  SPEAKER_00: And it's calculated on a two-year look back, which means the Roth conversion you do at age 62 affects your Medicare premium at age 64 and 65.
• 11:10
  SPEAKER_00: And because it's a cliff, not a phase in, you can go over a dollar a threshold and pay hundreds of dollars more per month per person for the entire year.
• 11:20
  SPEAKER_00: Conversions done between ages 63 and 72 have to be IRMA aware, or you can optimize your income tax and simultaneously get slept with a surcharge that eats the savings.
• 11:33
  SPEAKER_00: Mistake number three, converting when you shouldn't convert at all.
• 11:37
  SPEAKER_00: Some women shouldn't do conversions, period.
• 11:39
  SPEAKER_00: If you're a high income earner, still in your peak working years and expect to retire at a materially lower bracket, wait.
• 11:47
  SPEAKER_00: If you have almost all of your wealth and pre-tax accounts and no taxable cash to pay the tax, address that first.
• 11:55
  SPEAKER_00: If you have a large unrealized capital loss you plan to harvest in a specific year, coordinate.
• 12:01
  SPEAKER_00: If you're planning to donate a significant portion of your IRA to charity at death via a qualified charitable distribution or a charitable remainder trust, Roth Conversion doesn't help.
• 12:14
  SPEAKER_00: Charitable distributions from a traditional IRA are already tax-free to the charity.
• 12:19
  SPEAKER_00: Conversion is not universally correct.
• 12:22
  SPEAKER_00: It's a specific tool for a specific situation.
• 12:25
  SPEAKER_00: The women it's correct for are usually the ones I described at the top of the episode.
• 12:31
  SPEAKER_00: $1.5 million and over in pre-taxed 5 to 15 years from retirement, moderate to low taxable cash, kids likely to inherit.
• 12:40
  SPEAKER_00: If that's you, you have a decision to make and the window is open right now.
• 12:45
  SPEAKER_00: If that's not you, follow this episode and come back to it when the window opens for you.
• 12:49
  SPEAKER_00: The hardest part about the Roth conversion decision is not the math.
• 12:53
  SPEAKER_00: The math is arithmetic.
• 12:55
  SPEAKER_00: The hardest part is the feeling of writing a tax check on purpose.
• 13:00
  SPEAKER_00: Every cell in your body, every instinct you developed building this wealth is telling you don't give the IRS money until they force you to.
• 13:09
  SPEAKER_00: That instinct is what built your balance.
• 13:12
  SPEAKER_00: It's also the thing that if you don't overwrite it in the right window, it will hand the IRS significantly more money later.
• 13:20
  SPEAKER_00: Roth conversion is the moment you stop defending the balance and start defending the future after tax balance.
• 13:28
  SPEAKER_00: Those are different numbers.
• 13:29
  SPEAKER_00: The first one is what you see on your fidelity statement right now.
• 13:33
  SPEAKER_00: The second one is what actually pays for the life you planned.
• 13:37
  SPEAKER_00: If you've watched your parents do RMDs, you've seen what happens when somebody never does conversions.
• 13:42
  SPEAKER_00: They hit 73, the IRS starts pulling money out at the exact rate the IRS wants.
• 13:48
  SPEAKER_00: The tax bill is higher than they expected, their Medicare premiums jump.
• 13:52
  SPEAKER_00: And they realize usually in their early to mid-80s that the window they didn't use is gone.
• 13:59
  SPEAKER_00: Don't be that person.
• 14:00
  SPEAKER_00: The window is open.
• 14:02
  SPEAKER_00: It won't stay open forever.
• 14:03
  SPEAKER_00: Two things you can do after this episode.
• 14:06
  SPEAKER_00: First, if you want to know where you actually stand on this and every other retirement decision that matters between now and the day you retire, I built a free self-paced retirement readiness assessment.
• 14:18
  SPEAKER_00: It's 10 minutes.
• 14:19
  SPEAKER_00: Link is in the show notes.
• 14:21
  SPEAKER_00: Second, if after that assessment you want to talk to me directly about what a conversion schedule could look like for your specific account, your specific bracket, and your specific timeline, the aligned call is 15 minutes.
• 14:35
  SPEAKER_00: You'll leave the call knowing whether a conversion belongs in your next 12 months or not.
• 14:40
  SPEAKER_00: Link is right next to the assessment link.
• 14:42
  SPEAKER_00: Next episode, we go to the second decision in this window when to claim Social Security and why the math is different for women.
• 14:50
  SPEAKER_00: See you there.