Latest / The Wealth Cafe / How To Find Your Roth Conversion Sweet Spot

Transcript

How To Find Your Roth Conversion Sweet Spot · The Wealth Cafe

• 0:15
  SPEAKER_00: Welcome back to the Wealth Cafe.
• 0:16
  SPEAKER_00: I'm Caroline Tannis, lead financial advisor and founder of Tannis Financial Group.
• 0:21
  SPEAKER_00: Today I want to dive into something that is a little bit counterintuitive.
• 0:26
  SPEAKER_00: So bear with me on this one.
• 0:29
  SPEAKER_00: The best time to make a Roth conversion, and that is the move that shifts pre-tax retirement money into a tax-free Roth account, is often the time when it feels the least appealing to do so.
• 0:41
  SPEAKER_00: And this is when your account is actually down.
• 0:45
  SPEAKER_00: Converting and locking in actually feels like a loss, but it's truly the opposite.
• 0:51
  SPEAKER_00: When your account is worth less, you pay taxes on a smaller amount and get the same shares into Roth at a discount.
• 0:59
  SPEAKER_00: Every dollar of future growth from that point forward is now completely tax-free.
• 1:04
  SPEAKER_00: And fall, and that's the September through November timeframe, is uniquely positioned as the sweet spot for the decision and for the reasons that I'm going to walk you through today.
• 1:15
  SPEAKER_00: By fall, you actually know what your income is going to look like for the year.
• 1:20
  SPEAKER_00: At least you have a pretty good idea.
• 1:22
  SPEAKER_00: And you can see what tax bracket with some certainty and accuracy you'll fall into.
• 1:27
  SPEAKER_00: You have three months to execute before the window closes, and the market may have given you an opportunity in the form of lower account values, especially with the volatility that we have going on recently.
• 1:39
  SPEAKER_00: If you have significant traditional IRA or 401k balances, and most of the women in this audience typically do, the Roth Conversion Conversation is one of the highest value planning conversations that you can have between now and the year end.
• 1:56
  SPEAKER_00: Today's episode is the complete picture.
• 1:58
  SPEAKER_00: We're going to cover what a Roth conversion is, who it's for, and why Fall is truly the optimal planning window.
• 2:06
  SPEAKER_00: I also want to cover the traps to avoid and exactly what to do next.
• 2:10
  SPEAKER_00: So make sure you listen to the entire episode to understand how this can fit into your financial picture.
• 2:15
  SPEAKER_00: A Roth conversion moves money from a traditional IRA or 401k where contributions were made pre-tax and growth is tax deferred into a Roth IRA where future growth is completely tax-free and qualified withdrawals in retirement are never taxed.
• 2:34
  SPEAKER_00: The conversion is taxable in the year that you actually execute this change.
• 2:39
  SPEAKER_00: The amount you convert is then added to your ordinary income for that year and taxed at your marginal rate.
• 2:45
  SPEAKER_00: So you are paying the tax now from outside the IRA, ideally, in exchange for every dollar of future growth, being permanently protected from taxes.
• 2:57
  SPEAKER_00: Now, there are a few important mechanics that I want to go over.
• 3:00
  SPEAKER_00: There is no income limit on Roth conversions.
• 3:03
  SPEAKER_00: Everyone tries to fight me on this.
• 3:04
  SPEAKER_00: Anyone can convert any amount at any time.
• 3:07
  SPEAKER_00: It's not always optimal, but it is an option.
• 3:10
  SPEAKER_00: Direct Roth contributions are limited by income.
• 3:13
  SPEAKER_00: So if you earn above$252,000 filing jointly in 2026, you cannot contribute directly to a Roth IRA.
• 3:21
  SPEAKER_00: But you always can convert.
• 3:24
  SPEAKER_00: That is a distinction that matters.
• 3:26
  SPEAKER_00: The conversion is permanent.
• 3:28
  SPEAKER_00: So since 2018, the IRS actually no longer allows a re-characterization, meaning you cannot undo a Roth conversion once it has been completed.
• 3:37
  SPEAKER_00: This makes the decision very serious and one that you need to model out carefully before you actually go forth and execute it.
• 3:44
  SPEAKER_00: Here is the planning insight that drives the strategy for most of the women in this audience.
• 3:50
  SPEAKER_00: Financial planners often call it the conversion corridor.
• 3:54
  SPEAKER_00: So this is the window between your retirement, and this is when your wage income stops, and age 73, soon to be 75, when the required minimum distributions begin from your traditional IRAs and 401ks.
• 4:08
  SPEAKER_00: Now, during this window, your income may be at the lowest point of your adult life.
• 4:14
  SPEAKER_00: Social Security also may not have started yet, or you can choose not to have started it.
• 4:18
  SPEAKER_00: Your RMDs haven't become, and this is when income sources that have been filling up your upper tax brackets for decades are typically quiet.
• 4:26
  SPEAKER_00: And yet, your traditional IRA, it's just sitting there.
• 4:30
  SPEAKER_00: It's growing, it's compounding, and every dollar sitting in that account is going to be taxed as ordinary income eventually.
• 4:38
  SPEAKER_00: And now when you take distributions or when you take RMDs and those are forced to begin, or when your heirs inherit and face the 10-year rule and the distributions that they have to take.
• 4:50
  SPEAKER_00: This conversion corridor is the window to move money from pre-tax to tax-free at the lowest rates that you will see for the rest of your life, potentially.
• 4:59
  SPEAKER_00: Every year that you are letting pass without converting is bracket space that is permanently lost.
• 5:05
  SPEAKER_00: We can't get that back.
• 5:06
  SPEAKER_00: The optimal conversion amount fills your current tax bracket to its ceiling without spilling into the next one.
• 5:13
  SPEAKER_00: For a married couple with no other income in 2026, the 22% bracket goes up to$211,400.
• 5:21
  SPEAKER_00: The 24% bracket goes up to$403,550.
• 5:25
  SPEAKER_00: And for many retired women in this audience, there is significant room to convert meaningful amounts while still staying relatively within these favorable rates and also dramatically reducing future RMDs through this process.
• 5:40
  SPEAKER_00: This is the detail that separates a well-executed Roth conversion from one that costs more than expected.
• 5:49
  SPEAKER_00: And here is the thing: it is genuinely unexplained by most advisors.
• 5:56
  SPEAKER_00: Irma, I-R-M-A-A, actually stands for income-related monthly adjusted amount.
• 6:03
  SPEAKER_00: It is a surcharge on Medicare's Part D and Part D premium that kicks in when your income exceeds certain thresholds.
• 6:11
  SPEAKER_00: We call her annoying Aunt Irma in a lot of conversations.
• 6:14
  SPEAKER_00: And for 2026, Irma begins at$218,000 of Magi for married couples filing jointly.
• 6:21
  SPEAKER_00: And here is the trap.
• 6:22
  SPEAKER_00: Aunt Irma is calculated using your income from the two years prior.
• 6:27
  SPEAKER_00: So a Roth conversion you execute in 2026 is going to affect your Medicare premiums in 2027 and 2028.
• 6:35
  SPEAKER_00: And if the conversion pushes your 2026 income over the 218,000 Irma threshold, you will pay meaningfully higher Medicare premiums in 2028, that two-year rule there.
• 6:48
  SPEAKER_00: And IRMA is a cliff, not a slope.
• 6:50
  SPEAKER_00: And being$1 over the threshold triggers the full surcharge.
• 6:55
  SPEAKER_00: That tier is not a proportional increase.
• 6:58
  SPEAKER_00: So for a couple where both spouses are on Medicare, crossing the first Irma tier can mean over$1,900 in additional Part B premiums plus part D surcharges, which is important to know.
• 7:12
  SPEAKER_00: So what does this actually mean in practice?
• 7:14
  SPEAKER_00: When you are looking at a Roth conversion and planning for it at your wealth level, it requires modeling out the IRMA impact, not just the tax impact.
• 7:24
  SPEAKER_00: That is only one piece of the puzzle.
• 7:26
  SPEAKER_00: The optimal conversion amount fills your target tax bracket while also staying below the next IRMA tier.
• 7:33
  SPEAKER_00: That calculation is different for every person, and it is exactly the kind of analysis your advisor should be doing before anything gets executed.
• 7:43
  SPEAKER_00: September through November is actually the sweet spot for these concrete reasons.
• 7:48
  SPEAKER_00: And there are three of them that I want us to cover.
• 7:51
  SPEAKER_00: Number one is by fall, you have a pretty good working knowledge of what your income is going to be.
• 7:57
  SPEAKER_00: In January or February, your full year income is a projection and just an idea.
• 8:02
  SPEAKER_00: Whereas in September, it's getting pretty close to the fact.
• 8:05
  SPEAKER_00: You know your salary, your bonus expectations, and your RMD, if any, your investment income as well, and what that's projected out to be.
• 8:13
  SPEAKER_00: The income picture is the input that determines how much you can convert and what bracket.
• 8:19
  SPEAKER_00: Now in September, you can actually model out your pension and add that in as well.
• 8:24
  SPEAKER_00: However, when you have it in January, all of these pieces haven't come together yet.
• 8:28
  SPEAKER_00: So you're just guessing.
• 8:29
  SPEAKER_00: The second thing is you have time to execute without rushing.
• 8:33
  SPEAKER_00: A Roth conversion requires paperwork, custodian processing, and there could be some investment liquidation, and you want to have a reallocation plan inside of the new account.
• 8:43
  SPEAKER_00: This is a process that takes time and attempting to execute a conversion in mid-December when everyone is incredibly busy with the holidays.
• 8:52
  SPEAKER_00: You're trying to coordinate across multiple accounts, your custodian is now on this limited schedule because they're rushing to get all this done.
• 9:00
  SPEAKER_00: It's on introducing unnecessary risk, errors, and the possibility for delays, whereas September gives you three clean months of runway.
• 9:09
  SPEAKER_00: The third thing to think about is market volatility, which may have created an opportunity.
• 9:13
  SPEAKER_00: If your portfolio has experienced a decline from its peak in 2026, which some may have depending on what you're invested in with the volatility, there have been periods that have had meaningful volatility and ups and downs.
• 9:26
  SPEAKER_00: Converting during a dip means that you pay taxes on a lower account value, move the shares into a Roth at a relative discount.
• 9:34
  SPEAKER_00: Every dollar of recovery and future growth from that point forward happens inside of this tax-free environment that you have created.
• 9:42
  SPEAKER_00: Let me tell you about a client who I've renamed to Rosemary because we always change someone's identity here.
• 9:47
  SPEAKER_00: Rosemary was 70 when she came to me and she had retired at 65 from a 30-year career as an incredible corporate attorney.
• 9:56
  SPEAKER_00: She had such a powerful background.
• 9:57
  SPEAKER_00: And during her working years, she had contributed faithfully to her 401k and she had accumulated a substantial balance.
• 10:05
  SPEAKER_00: It was something to the tune of$2.8 million in traditional pre-tax accounts.
• 10:10
  SPEAKER_00: She also had a small Roth IRA, which she had opened years ago and thrown a few thousand dollars in, not really thought much about.
• 10:18
  SPEAKER_00: She had a taxable brokerage account that also had another$1.1 million inside of it.
• 10:23
  SPEAKER_00: At the age of 70, with RMDs beginning at 73, Rosemary had this three-year window, but she had never done a Roth conversion during the five years between her retirement and now her age of 70.
• 10:37
  SPEAKER_00: She also said to me, she goes, nobody told me to.
• 10:40
  SPEAKER_00: And I just assumed that my accountant would have mentioned it if it was something important.
• 10:46
  SPEAKER_00: And he hadn't because he was looking backwards, not looking forwards at the future.
• 10:52
  SPEAKER_00: That's what most accountants do here.
• 10:54
  SPEAKER_00: Rosemary's RMDs at 73 would have been approximately$112,000 in one year based on the required distribution table if we had applied that to the$2.8 million balance.
• 11:05
  SPEAKER_00: Yes, it could have been higher given growth.
• 11:07
  SPEAKER_00: Adding her social security and her investment income, this would push her right into that 24% bracket, potentially 32% for the rest of her life.
• 11:17
  SPEAKER_00: It was also looking to trigger Irma surcharges that would increase her Medicare premiums substantially.
• 11:23
  SPEAKER_00: So here's what we did for her: we ran an accelerated three-year conversion strategy.
• 11:28
  SPEAKER_00: And in each of the three years before her RMDs began, we were converting$150,000 to$180,000 per year, filling her bracket efficiently, and trying to stay just below that next Irma tier.
• 11:43
  SPEAKER_00: Over three years, we then moved approximately$480,000 from traditional to Roth.
• 11:50
  SPEAKER_00: Now we didn't eliminate the RMD problem in total.
• 11:53
  SPEAKER_00: We didn't have enough runway and time to do that, but we did material reduce the future tax burden that she was facing.
• 12:01
  SPEAKER_00: The one thing she said to me was if I had started this at 65, I could have had converted twice as much at lower rates.
• 12:08
  SPEAKER_00: And the five years between retirement and when I came to you were the most valuable years for this strategy.
• 12:14
  SPEAKER_00: And I didn't use a single one of them.
• 12:17
  SPEAKER_00: The conversion corridor is finite.
• 12:19
  SPEAKER_00: And every year that it doesn't get used, it's gone.
• 12:22
  SPEAKER_00: And the women who are using it well, who actually start in September with a clear picture of their income and execute before year end, they are building a fundamentally different tax future than the ones who don't.
• 12:36
  SPEAKER_00: So let's break down the three actions that I want you to take away from here.
• 12:39
  SPEAKER_00: Action number one is find out where you are in that Roth conversion corridor.
• 12:45
  SPEAKER_00: If you're between retirement and the age of 73, you are in that window.
• 12:50
  SPEAKER_00: If you are approaching retirement in the next one to three years, then you are about to enter it.
• 12:56
  SPEAKER_00: And this is the time to ask your advisor and say, hey, given my current income picture, my traditional IRA balance, how much room do I have to convert this year before I move into the next tax bracket?
• 13:09
  SPEAKER_00: And what does the Irma impact look like for 2028 based on a 2026 conversion?
• 13:16
  SPEAKER_00: These are two questions that together are going to tell you whether a conversion is worth modeling for this year and how much you could consider converting.
• 13:26
  SPEAKER_00: I would also bring your CPA into the conversation and have them give a look at the numbers as well.
• 13:31
  SPEAKER_00: Action number two, do not pay the conversion tax from inside the IRA if possible.
• 13:36
  SPEAKER_00: This is something critical.
• 13:37
  SPEAKER_00: It's a lot of times overlooked and determine what amount of taxes you want to withhold when making the conversion versus how much you can pay from outside resources like cash, sitting in bank accounts or other taxable accounts.
• 13:51
  SPEAKER_00: Navigating this calculation, it's a key time to lean on your CPA and your financial advisor to make sure that they are working together in tandem on this one and also have a plan for where you're going to pull cash to live off of for the next couple of years.
• 14:07
  SPEAKER_00: Action number three, if you decide to convert, execute this by November 30th.
• 14:13
  SPEAKER_00: You can still do it in December, but the timeline is very tight.
• 14:16
  SPEAKER_00: Custodian processing times, holiday schedules, and the end-of-year backlogs that a lot of these places see make December a really high-risk month to do conversions.
• 14:26
  SPEAKER_00: And by November 30th, you have a really clean runway.
• 14:29
  SPEAKER_00: You have proper time to coordinate everything, the ability to verify that the conversion was actually completed and completed correctly before the calendar year closes and reduce a lot of your stress.
• 14:40
  SPEAKER_00: Model in September, decide in October, and execute in November so you can enjoy all of the holidays that come around in December.
• 14:49
  SPEAKER_00: The conversion corridor is one of the most valuable windows in your financial life.
• 14:54
  SPEAKER_00: You can either use it or you can let it pass you by.
• 14:57
  SPEAKER_00: The women who use it strategically with the right advisor, the right CPA at the right amount, they are building permanent tax-free wealth that is going to compound for decades and also into the next generation.
• 15:11
  SPEAKER_00: The window closes at 73, soon to be 75, depending on the year you were born.
• 15:16
  SPEAKER_00: And September is when you want to start.
• 15:18
  SPEAKER_00: As you prepare for year end, meeting with your financial advisor, your CPA, and potentially even your estate attorney, go in, prepare to ask questions.
• 15:27
  SPEAKER_00: And if you don't know the right questions to ask, make sure you are listening to the podcast week after week as we give you more insights and more things to think about.
• 15:35
  SPEAKER_00: And use your gut.
• 15:36
  SPEAKER_00: If it's time to get a second opinion or even time to start working with a financial advisor, head over to tannisfingroup.com backslash contact to apply for a complimentary intro call to take a look at what it would be to do a Roth conversion this year before the year ends and start your financial planning and wealth management journey.
• 15:56
  SPEAKER_00: Thank you so much for tuning in to this week's episode of The Wealth Cafe.
• 15:59
  SPEAKER_00: And I look forward to seeing you again next time.