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When Roth Conversion Don’t Apply in Retirement · How to Retire on Time

• 0:00
  Mike: Welcome everyone to how to retire on time. I'm Michael Decker here with David Franson from Kedrick Wealth. This show is all about answering your retirement questions. Say goodbye to that oversimplified advice you've heard, what, hundreds of times, the generic crap. This show is about getting into the nitty gritty because that's where it matters.
• 0:15
  As always, some ear questions anytime during the week to retireon time.com/ask, and we'll feature them on the show. Or if you're joining us live here on Zoom, you can put them in the chat right now. This chat is live. My screen literally has your comments. I want you to push back on me.
• 0:28
  I want you to question. Say, hey, can you clarify that? That stuff matters. K? We're talking taxes today.
• 0:33
  I do have a poll going on about what concerns you, but taxes is what bugs me. Now, David, let me tell you why. Okay. Taxes is this arbitrary thing that only your CPA is supposed to do because advisors can't give tax advice Mhmm. Which is ridiculous.
• 0:50
  Like, okay, I get that an advisor can't give tax representation advice legally in front of the IRS. But when it comes to strategies, when it comes to how to get more of your money, we're able to do that. It's a part of our licensure. Yeah. Yet, oh, I can't give tax advice, but let me sell you this product that's really tax efficient.
• 1:11
  Well, hold on. What what's really going on? So and and the other part of this too is tax planning, which is kind of most of the work I do. I'm an investment adviser. Yes.
• 1:22
  I am an insurance agent, and yes, I can file your taxes. But the majority of what I do is tax planning. Why? Because for many people who wanna retire, that's your make or break. So today, I thought it'd be appropriate to really highlight tax planning.
• 1:39
  How to get more out of your money. That is the mission. Because the last thing you want to do is to be in a situation where you're working with someone, whether it's an advisor or AI, you know, the a words of finance. Mhmm. You're working with someone that's given you some feedback, but it's incomplete because you're not asking all of the right questions.
• 1:57
  Maybe you didn't know to ask about '72 t or '72 q, and that would be your ability to retire at early fifties, or the rule of 55, because that was never brought up. Know, all these things matter, and that's that's jargon, don't worry. I'll break it down to you in just a second. But it's often the difference of being able to retire on time and working a few years longer because you didn't know how to get more out of your money. It's often the difference of barely having legacy and barely being able to make it, and having 6 to 7 figures passed to to the kids or whoever, the charity of choice.
• 2:32
  These things matter. They matter a lot and they make up big differences. Usually with with the average retiree I'm I'm working with, it's like an extra million dollars.
• 2:41
  David: That's incredible.
• 2:42
  Mike: And if you think about it, the subtle adjustments that you make at the beginning of retirement, you know, 50,000 paid less in taxes here or 30,000 in savings here, or we took out 20,000 from your Affordable Care Act premiums. That money, let's just round it off, $100,000, if you just put an extra $100,000 in your retirement portfolio, and let that sucker ride for another twenty to thirty years, that's worth a lot of money. So, yes, tax planning matters. Yes, the dollars might seem a little insignificant at the beginning, but there is a massive ripple that happens later on in your plan. And if you don't know where to look, I sound like Ferris Bueller, life moves by pretty fast, you just might miss it.
• 3:25
  Yeah. Now this also goes not just for those who are retiring right now, or those who just retired. If you're five years away from retirement, there are many opportunities that we could talk about on how to fund it correctly, because most people don't. You know how do most people fund it? Oh, I have a four zero one k, I'll just get my match there, I'll call it good, and I'll figure this out later.
• 3:45
  Oh my gosh.
• 3:47
  David: Right. Yeah. Too many people
• 3:48
  Mike: like have that mindset. Right? It's just missed opportunities.
• 3:51
  David: And and and, you know, and we can't blame them. How would they know otherwise? Right? They this is what we're sort of conditioned to do. Yeah.
• 3:59
  We just max out your four zero one k. That's the advice.
• 4:01
  Mike: Let let me let me be fair about this. Okay? So I'm gonna use a health not health care, but a health example. Okay? So health and nutrition.
• 4:09
  David: Alright.
• 4:09
  Mike: Alright. Let's say, David, that you just constantly feel bloated. Right? You know, you're you're trying to eat healthy and it's just not hitting right. You eat clean, but it's just you always feel kind of sluggish.
• 4:20
  There's brain fog that you're lethargic and so on. Sure. Would you ever have thought to maybe do a methylation or a genetic test and see if you have MTHFR or m MFR or these other genetic anomalies that make it so you cannot digest certain things, so that if you eat healthy food, but you're the wrong person, it ends up being like sludge in your gut. It can't pull out the nutrients, and you're gonna be in brain fog in perpetuity unless you knew like, who who would know that. Right?
• 4:49
  Yeah. And I've met many nutritionists that didn't know to ask that because they focus on the intake of macro diets, which is important. But methylation might not be their specialty. Maybe they haven't done their research on that. Right?
• 5:01
  Maybe the doctor is prescribing you some sort of medication to try to offset the difference. This is very Isaac Newton Newtonian kind of medicine to try and offset the difference. Well, hold on. Pump the brakes.
• 5:14
  David: What
• 5:15
  Mike: if you just ask more questions? What if you had a more comprehensive perspective on how to do retirement planning? Because you got income planning, you got tax planning, you got health care planning, you got legacy planning. I mean, all these different things affect each other. So let me give you a couple of examples.
• 5:29
  And by the way, how much money you have saved determines your tax planning. I cannot emphasize that enough and here's why. If you have, let's say, $500,000, which we help a lot of people that have about $500,000 retire on time, happy as a clam. Yeah. Okay.
• 5:52
  Your tax your income might from your portfolio might be anywhere from 20,000 or so if we assume broadly the 4% rule. Now planning would would be able to dictate that a little bit more here, little bit less there, but let's say four or 5%. So $2,020,000 or so coming from the portfolio. K? You got 20,000 coming from the portfolio, and you've got Social Security coming in, and that bridges your gap, why in the world would you do a Roth conversion?
• 6:15
  Yeah. I mean, really. Right. You're sitting, if it's married finally joint, or even if you're single, most of your retirement distributions tax free. Why?
• 6:25
  It's called the standard deduction. I've heard of that. So why would you pay 22 to 24% on an IRA to Roth conversion when you could just slowly pull it out in the standard deduction tax free? Oh, because debts going up and because taxes are going to go up. Yeah.
• 6:42
  That's what they said in 2012 or not '20 well, I mean, they always say this. 2012, 2020, 2024. You know what's funny about '24? People doing massive IRA to Roth conversions. Oh, taxes are gonna go up doomsday.
• 6:54
  Yeah. And then what happened? Trump gets in the office Yeah. Which no one really expected that. That was kind of a long shot Mhmm.
• 7:01
  For a while. And I mean, depend on your belief system. And I I don't mean that religiously. I mean that politically. But then he passes the one big beautiful bill and taxes get cut.
• 7:13
  Mhmm. Oh, you planned wrong.
• 7:17
  David: Right.
• 7:18
  Mike: We don't wanna go extreme. We want systems. But what politicians gonna get reelected or praised if they taxed the quote unquote poor? Not gonna happen.
• 7:28
  David: Right.
• 7:28
  Mike: The standard deduction's probably gonna stay in there most of the time, if not in perpetuity. I don't think that's really gonna go away. And then maybe the 1012% bracket, the one that you would be in, if you have 500,000, 700,000, if that's your range, a million dollars or less safe for retirement, you could probably retire, just depends on how much income you want. But why would you be paying high taxes on conversions? When you could do the same management slowly pull out of the portfolio and stay in the 10 to 12% bracket, and maybe it goes up to 15.
• 7:59
  Maybe we go back to the 15% bracket. Fine. But your income was taken the lower brackets out, and then if you just stayed in there, that's better than 22% or 22¢ on every dollar converted. Mhmm. And the problem, this is the math.
• 8:15
  The problem is, see people say, well, let's just let's just move it over quickly, and then it'll grow tax free, and then it'll pay out tax free, that'll be a bigger number. That's true. But it's not an apples to apples comparison. Because when you do a conversion, money leaves your account.
• 8:29
  David: Yeah. And what happens?
• 8:30
  Mike: It's harder to grow less money. So you've gotta be very careful about the arbitrary tax advice of, oh, taxes are probably gonna go up. Oh, the debt's an issue. Like, I know I know the debt's an issue. I would argue though it's not a debt issue, it's a spending issue.
• 8:47
  That's another time for another podcast. If you wanna be talk more about that, put in the chat. But the conversation is fundamentally about where are you historically on those tax rates and how do you get the most out of your money. Because you could do a massive conversion. That's true.
• 9:03
  If you have a million dollars or less, massive conversion and everything else is tax free. That sounds really nice.
• 9:09
  David: Sounds really good.
• 9:10
  Mike: That is the greatest premise for a product sales pitch. Yeah. Whether it's index universal life insurance, whether it's, you know, it is. Right? Whole life.
• 9:19
  And it's it's the insurance agents that like to get your money out of the IRA as fast as possible, sell the the policy, and then, you know, they they made their commission. And that's fine. It's not that it's wrong. Mhmm. It's that hold on.
• 9:33
  What are we really trying to solve here? Yeah. Let's pump the brakes instead of the product commissions. And I poke fun at the insurance agent people, not that they're wrong, that they're compromised because what they sell has to work based on that story they have to tell. Mhmm.
• 9:48
  What if you didn't need a death benefit? Should you really be buying life insurance? Well there's tax benefits, that's true. I know seventy two zero one of the tax code. I read it too.
• 9:57
  But, what's the break even? What's the cost? What liquidity do you lose? These are questions we need to ask.
• 10:06
  David: And the people may not know to ask that question.
• 10:09
  Mike: No. And how would you? Right. I mean, really. This is complicated stuff.
• 10:15
  So let me me throw a few things in here. Okay? And let me know if if I go too fast, but you can put in the chat, and I can comment as such. But if you've got a million dollars or less, there's a good chance that RMDs are self fulfilled. Here's what I mean.
• 10:32
  Yeah. An RMD is a required minimum distribution. It means you're required by law at some point, they keep changing the dates, but at some point you have to pull money out of your IRA. If you pull money out of your IRA, you're paying taxes on it. Line 72 of the tax code, it's a whole section.
• 10:49
  Talks about how, and they made it very very secure
• 10:52
  David: here. Mhmm.
• 10:52
  Mike: You're paying income tax if money leaves that. Yeah. Now, remind me if I if I missed this. There are some strategies that people talk about and how to kind of offset that income tax. It's often sold with all the benefits, never acknowledging the detriments.
• 11:06
  But if if money's coming out of your eye, right, you're paying taxes. So the question is, do you wanna slowly drain that tax bill, maximizing your utilization of the standard deduction and the lower tax brackets, which will probably kind of stay in that ballpark for the rest of your life? Or do you wanna quickly go to the zero bracket and just hope things work out in your favor even though the odds would be against you?
• 11:29
  David: I heard the word hope in there.
• 11:31
  Mike: Yeah. It it's things like this that bug me, but so if you got a million dollars or less, there's a good chance that RMDs are not gonna be an issue. Why? Because the income you already want will likely already satisfy the RMD.
• 11:43
  David: Oh, okay.
• 11:45
  Mike: You see how that plays out? Yeah. The income you want already most likely satisfies the RMDs. So what's the point? Now, let me do a little example here, and I'm pulling up our tax calculator, which everyone that buys our kit, the Retire On Time kit.
• 11:57
  So retireontime.com resources kits, like $97 right now. You get our workbook, you get AI prompts, you get a planning checklist, you get access to all the tools we use internally here as well, which is a pretty sweet situation. K. So I'm gonna pull up here. Just put two people.
• 12:14
  Let's say they're both born in 1966. Okay? And let's say they've got 500,000, so they're gonna pull out, I don't know, let 20,000 for their portfolio. They can live a nice modest life, and they got 35,000 coming in from social security. They're basically paying nothing in taxes.
• 12:30
  David: Mhmm.
• 12:31
  Mike: Okay.
• 12:33
  David: Because of the standard deduction?
• 12:34
  Mike: Because the standard deduction, and then how Social Security is taxed. Yeah. Now that's a whole thing too. We gotta talk about what Social Security taxation is called a tax torpedo, Because you can get taxed twice by increasing your taxes in one place, while you increase your tax exposure in social security. It's gonna be very costless a bit.
• 12:51
  Again, million dollars or less, your tax planning is more delicate than million dollars or more.
• 12:56
  David: That's interesting.
• 12:57
  Mike: Fine tuning this matters. People say, tax planning is for the rich. No, it's not. It's actually more delicate for those who have less than a million dollars. But if we look at this, your adjusted gross income, the taxable amount in this situation I quickly threw together, it's about 22,000.
• 13:12
  You've got 10,000 tax free still. You might do a $10,000 IRA to Roth conversion because it's still within the standard deduction, married, filing joint. Who's talking about doing IRA to Roth conversions within the standard deduction? There's a group of people that are often neglected, where this is the planning that you would do. Every advisor wants to work with the ultra wealthy.
• 13:39
  Oh, yeah. Well, what about the common person? They need tax planning too. They gotta retire. Everyone wants to retire.
• 13:45
  It's beautiful. Wanna retire on time. Yep. So so you got 500,000 or less. This is an example of what tax planning really looks like, and it can save you a ton of money.
• 13:53
  When I say save you a ton of money, I mean paying a lot less in taxes, holding on to more of your money. If you keep more of your money, then you're able to grow it better. And if you're able to grow it better, you can get more out of it for income or legacy purposes. Now let's say it's 500,000 to a million dollars, maybe you can't do IRA Roth conversions within the standard deduction, but you still have some room within the 12% bracket. If you got some room to kinda move around a little bit, maybe you dip a little bit into the 22% bracket.
• 14:19
  And by the way, you don't wanna manage your taxes on tax brackets. Tax brackets change. The percentages change. Right. The dollar thresholds change.
• 14:29
  It's the effective tax rate that's the silver lining between it all. That's your target. That's how you navigate tax risk, congressional risk, political risk, legislative risk, whatever you wanna call it.
• 14:42
  David: And so effective tax rate, for for anybody who doesn't know, that's you're in this certain bracket, but when all is said and done, ultimately, what you the percentage of taxes that you paid, that's the effective tax rate.
• 14:53
  Mike: Think of like your taxable income. Mhmm. How much pay you paid in taxes? What's that percentage?
• 14:58
  David: Mhmm.
• 14:58
  Mike: 12%? Is it 15%? Is it 22%?
• 15:01
  David: Mhmm.
• 15:01
  Mike: That's the more honest calculation. And here's why. People say, oh, well, Mike, no. No. Hold on.
• 15:05
  You gotta manage the brackets. Mhmm. If that's true, then you must be saying, well, it's January. I'm only gonna pay 10¢ for every dollar I take out of my IRA. But in February, I'm gonna take out 12¢.
• 15:17
  And I'm gonna adjust my withdrawal rate. And then maybe somewhere June or July, now you're gonna adjust the 12% to 22%. Because now no one really does that. You have to look at it from the full picture, and the only way to correctly do that, in my opinion at least, is to understand and track your effective tax rate. Yeah.
• 15:39
  Hey, gonna take a quick break here and remind you this show is called How to Retire On Time. And if you want more retirement resources, go to retireontime.com where you can grab my book. You can join any of our live classes and so much more, all of it free. Retireontime.com. Go there today.