March 2026
In this conversation, Kevin and Chris break down Roth conversions: what they are, when they make sense, and how they can create more control over your financial future. By converting pre-tax retirement dollars into a Roth IRA, investors can pay taxes today in exchange for tax-free growth and withdrawals later.
Tune in if you’re interested in…
Watch previous episodes:
Ep. 177 Morton's Take on Market Headlines
Ep. 176 Why Generational Diversity Matters in Financial Advice
Kevin, are you ready to talk about taxes and Roth conversion? I love it. Let's go. It's one of our favorite things, right? We're talking about taxes. All right, so Roth conversions. When? When we talk about Roth conversions. And I'm saying the word convert. What I'm really meaning is we're paying tax by taking pretax dollars and converting that to a Roth IRA that can now grow tax free.
And you can access tax free. So right now, if you've got a 401 K or a traditional IRA, all that money is pretax. You kind of co-own it with the government. When I take a dollar out of that account, I have to pay income taxes on it. So we have a choice. And there's a strategy with some clients called Roth Conversions, where we can take a portion of that convert pay tax today, get that money into a tax free account that can grow tax free.
And so like why does this make sense for people. Like why would you want to pay tax today. Versus down the road. Nobody likes paying tax. Yeah.
It's to tell someone to pay tax earlier than they have to you just seems so counterintuitive. So people don't always like the strategy. But it comes down to the math. And we'll talk a little bit about that. But the answer is it's really taking control. In the future, you will be forced to take money out of your IRA and every dollar that you take out.
So through RMDs are required minimum distributions. Every dollar that you take out is taxed at ordinary income. So every dollar that grows from now until that point, you're creating a higher tax burden. So by doing the conversion, taking the IRA, making it a Roth, you're paying the taxes today. So you're paying the tax on that basis part. But every dollar that grows will come out tax free.
So you've now shifted money into an account where you just have a lot more control in the future. So if you need to take money out to redo a house or pay for something for the kids, you're not stuck. You're creating more income by pulling from the IRA. You have that second bucket so that that control is usually the biggest piece.
I love I love the way that you phrased that in, in, in, in talking about the analysis and when it makes sense, you and I feel pretty strongly about this one. If you're going to do a Roth conversion, you've got to have money outside in, like a brokerage account or a trust account to be able to afford to pay the tax on the conversion.
You don't want to use the IRA money to convert and pay the tax, because that that's where the math doesn't really math as.
You're creating more tax just to pay tax. And that again, it doesn't end up adding up or making sense in that situation.
How do you think the one big beautiful Bill act has changed our thoughts around Roth conversions or things to kind of take into consideration.
The it's a great question, and there's a few ways. I think the main one is there used to be an uncertainty around where tax brackets were going to go. So when the sunset happened and then over extended that. So now the kind of the rush to get it done quickly went away. There's a couple other benefits that help.
The one being the senior deduction. So adding a larger deduction. So that gives a lower ordinary income to people that can maybe convert more. You have the Salt deduction right. The changes to the salt tax is being able to be more deductible. So all of those things kind of created a situation where the timing went away. But very important to be strategic.
So now there's all these different different income levels that create Medicare not taxes but Medicare costs go up. And making sure you're not phasing out of some of these deductions. So it's really important to look at those numbers and create a really, strategic plan.
And so like for that example, if somebody, you know, all of their income from Social Security and their investments, everything is around that $250,000 range. You can look at doing Roth conversions not to exceed that state and local tax limit. I think it's around $500,000 married filing joint. So you've got that room there to where they can still take advantage of the state and local tax and not breach that threshold.
But then you also have to take into consideration that the Medicare premiums may be higher down the road because there's that two year look back.
It's a two year look back on it. And I've done a few lately where you look at paying more in the Medicare costs. It still ends up maxing out in the end. And so it doesn't mean that you don't do it, but you have to look at all those different numbers and make sure that it makes sense.
What about from like an estate planning or inheritance sort of gifting thing? Because this is where it gets a little bit complex in my mind in terms of when does it make sense and what's the breakeven? I feel like the old rules on inherited IRAs made it much easier to kind of figure out whether or not Roth conversion made sense, because if you if you inherited a traditional IRA and you're a kid, I could stretch those distributions out over the course of my life and take a little bit out of it, out at a time.
Now there's that whole ten year window where an IRA has to be distributed within ten years. And so if you've got a few million dollars in an IRA that you inherit and you got to take, you know, all that money out over a ten year period, I'm getting into the higher tax bracket really fast.
Yeah, we do hear that clients are like, well, my tax brackets higher than my children, so why would I pay it when they can pay it at a lower bracket? But when you add in those distributions at a compressed rate, it does increase them out of it. The we take that into consideration. Again it all comes down to running the numbers.
You have to make a few assumptions, but one that I think kind of often gets overlooked. We usually make assumptions around most of our clients we're looking at like married filing jointly, and they're at a certain bracket. Well, what's that tax bracket going to be in ten, 20 years when they start taking RMDs? We don't really know. So we make some assumptions.
But one thing we also need to consider when you're married filing jointly, you have a bigger bracket. You get larger deductions. Well, what if something happened to a spouse and all of a sudden that IRA or both, IRAs become one, those RMDs get bigger and the deductions get smaller. And so we have to run these different scenarios and say, okay, what's the likelihood or probability of generating more wealth and growing that?
Well, for our family and in most Roth conversions, it makes sense.
Yeah, I like that that you brought that up. Because oftentimes when we're planning we're looking at a couple and married filing joint, came across a situation not long ago where, unfortunately, a spouse passed away. The spouse inherited or took that IRAs, their own that IRAs call it $4 million in value. So really large size. But this client is now in a single bracket in their late 80s.
And so their distribution percentage is like close to 78% per year that they have to take out on $4 million. I mean, that's $300,000 a year in income at a much higher bracket than when they were married. Taxes are now a much larger issue or pain point for that client. And so looking back, they could have probably benefited from maybe doing some Roth conversions.
Yeah. And I think people they believe you have to convert everything. And that's not always the case. Right. So had you done some amount over time, every dollar that you convert essentially will create more wealth for your family in the future. If done strategically. Yeah. So have you done any lately or any clients that you've worked on?
Yeah, I've kind of I've got a client that, you know, every year, call it late November. We look at their income for the year between Social security pensions and what their investment income is down. And it's typically around the 2 to $250,000 range. And so in looking at it, that gives us an extra call it 40 to $60,000.
Keep within that that 2,224% bracket, because their kids are successful and doing well. And so if they were to inherit these dollars, those distributions are going to be coming out at the 37% federal bracket. And so it just makes sense to do kind of 30 to $60,000 chunks, every single year in a given year, just to prepay a little bit of tax.
Now knowing that their kids are going to have to pay less tax in the future.
That's great. And it's not everything. But now you have that other bucket. So kind of going back to control. And one thing we were even talking about a lot of people these days are self insuring for long term care. Yeah. The cost of insurance has gotten crazy expensive. Obviously the insurance companies underpriced it in there. Like people are living longer.
Health care is getting better. So more, more and more people are self insuring if you only have that IRA or retirement bucket and you need more money to take care of yourself or your spouse, your family, everything you take out is that ordinary income. So even though you might not be converting everything, if you're building a bucket of tax free money, it allows you to now play the game of oh, we're not beyond the 24% bracket.
Let's pull from our IRA. Or if we pull more, it's going to bump us to the 32% bracket. Well, let's pull from our Roth. So that strategy becomes really important in the optionality, the control we always talk about. It's it's a really big deal, especially when it comes to long term care and self insurance.
Yeah, long term care is one of those unknowns in the world. But we know it's expensive. I mean it's pretty easy to have costs that run, you know, 10 to $12,000 a month or even more if you need full time, you know, care and help. And if you just have that pretax retirement bucket you're having to accelerate withdrawals and accelerate extra taxes.
So that really that buckets of money approach is extremely important. In fact, I was just talking with Ian about this on another episode, you know, clients that only have that IRA bucket, but then I have all this equity inside their house that they can't access having bucket buckets of money, regardless of the interest rate that you're paying, creates a lot less burden than the tax drag that you can get that 25 to 32% taxes on withdrawals federally.
That bucket to money approach is good. So you've seen people or you have clients that have a dedicated Roth account that they're looking at, hey, I, I can afford to self-fund long term care and that Roth can be used down the road if need it.
Absolutely. Yeah. Again just gives that extra bucket, that extra strategy to it. So I've been getting asked actually lately like, well, who should do the Roth IRA like Roth conversions. Like what makes sense? And I don't think it's ever too early to start it really comes down to what is your income? If you have a year where maybe you're self-employed or you run a business and you're taking significant losses, or maybe you took a year off work to do something like, you could be young and there still could be times where it makes sense to convert up to certain brackets, knowing that in the future your brackets are going to be higher.
But the sweet spot if anybody retires early. So prior to taking Social Security, kind of typically late late 50s, early 60s, before Social Security, before it starts impacting Medicare, before you get into your 70s and you have RMDs, it gives you a long enough runway to where you can start planning. And we were talking about this too, where doing all of it in one year is usually not the best strategy.
The One Big Beautiful Bill act allowed enough from deductions and tax bracket expansion to where, if you do sum over a multiple year period, that usually provides the biggest benefit again, control strategy. All of that makes sense to to preserving and growing well.
But even, you know, shared at one of our advisor meetings recently, a client that's 70 years old that has a very large IRA, even doing a few hundred thousand dollars of Roth conversions before the required minimum distributions start. It was it was interesting to see that the break even for this, for this particular client was a lot sooner than I thought.
I think it was like early 80s that the math really made sense for this person. So if you're 70 years old and you haven't done any Roth conversions, it's not too late. One of the other timing periods that I think is fascinating to take advantage of when it comes to Roth conversions. Let's say you've got an IRA and you've got a few hundred thousand dollars in stock exposure in it.
If we were to go through a recession and prices come down significantly, what a great time to convert, pay the tax on moving those stocks from your IRA to your Roth, and then benefiting by the rebound and the growth from there. You can it's very difficult to time the market from a buy or sell thing, but you can time opportunities for do Roth conversions when people are scared or markets come down.
That's they love that strategy. It's in fact there used to be rules where you could take advantage of it and convert early in the year and then get smart. The government shut that down because they knew people were doing that exact thing. But yeah, to the extent possible, I keep going back to it. But the strategy, it's not it's not hard to do this, but there are a lot of moving pieces.
And that's where running the financial plan, looking at the data, coming back to the math using a few assumptions, but it's usually pretty black and white stuff. If clients are out there and they want to say, hey, sounds interesting, does it make sense for me? We can look at the numbers and we can look at timing. We can look at estimates and say, this is what it'll cost you.
This is the benefit to it. So that break-even point matters.
Kevin, thank you so much for joining me on this conversation today. If you're saving for retirement, pay attention to having buckets of money. Try to have some in a taxable account like a trust or an individual account. Have some pretax dollars, but don't be afraid to start either converting or contributing to a Roth if you can. Kevin, thank you so much.
Thanks a lot.
