PODCAST 85: Who Should Consider Roth Conversions?

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Below is a transcription of the Ask Gregory Podcast 85 – Who Should Consider Roth Conversions?

Gregory Ricks  00:00

Hey, welcome. I’m your host Gregory Rick’s a financial advisor here to answer your questions and help you win with your money.

Podcast Intro / Outro  00:10

On today’s episode of the Ask Gregory podcast, Gregory is joined by Jude Heath of J Heath & Co CPAs. Together, they’re going to be discussing who should be considering roth conversions. Also, we’ve got a complimentary download waiting for you on this topic. If you go to gregryricks.com/podcast85. Again, that isgregryricks.com/podcast85

Gregory Ricks  00:33

And the conference I was at last week. And I do this a couple times. But ad slot want to say one of the foremost Ira trainers out there on qualified plans. I’ve been a member of that group for years, and I credit a lot of my knowledge to that exposure. And we were near the end. And one of the individuals asked him said, look, what about that top tax bracket? You know, what we kind of focus on this 22 to 24%. Sweet Spot, but you got some people that make more money. And as well as could they get pushed into higher tax brackets, and should the tops tax brackets, which currently is 37% from the brackets, but there’s a little bit more added on there as well, situational. But that top tax bracket looks like going to revert back to 39.6%. And that’s at 470,000 or more. Remember, I’m rounded, rounded down slightly. But that 37% currently is 640,000 or more. But let’s just say you’re somebody that said that 32 or 35%. And they were asking was should these top tax brackets convert? And yeah, they’re gonna pay more in taxes, what his response was, if you’re in high income earner now, you’re probably going to always be a high income earner. And whenever you hear discussions from a government standpoint, we don’t have to name names. But you know, what generally is they’re talking about, who do they want to raise taxes on? It’s the high income earners. So Ed basically said, if you’re a high income earner, you’re probably always going to be one. And he said, Yes, you should convert, you’re not going to end up in lower taxes, you’re going to end up in higher and get that money to growing tax free, and your taxes are likely to be going up, they’re not going down. So he said even if you’re in those brackets, it makes sense to start converting money to Roth and create a strategy to start chipping away at that we don’t have to. And regardless of whether you’re in 12% 2435 37, I think it’s a plan of chipping away at it, we’re not going to Oh, convert my whole million dollar IRA or convert my $400,000 401 K, it is a plan to chip at it, it might not make sense to convert the whole thing probably rarely does. But it does make sense to start chipping at it to where if you’ve got some March and and it might shift 10,000 A year or 30,000 a year. And it might only be a window that works for you for a few years. But those are the situations that you know, we’ve worked with people in the past that done it every year for a decade to where they’ve pretty much made a really big dent in their qualified money. It’s just we know we’re not moving into favorable tax times because we don’t have a government like, oh my gosh, citizens of the US guess why? We’re bringing in more revenue than we spend. It’s redacted and we’re piling up money so we’re gonna pass it along to you. That’s never happened in the history has it? No. You’re laughing over there. Buddy like citizens. We got great news. We have excess revenues. We’re cutting taxes more it’s not happening. Not going to they’re they’re not wired that way too. If they’re getting in more, they’re gonna spend more than they’re getting. So if they increase revenues want the guy to spend some more there. So the point is, you’ve got to consider at chipping away with that. And that’s one reason.

Gregory Ricks  05:15

We run a tax efficiency strategy at the firm and create those conversations and people need to run it through you or talk to you. And if they’re not using a professional, I said, Well, you got to start using Jude Heath on this, but we want them to that ticks, tax efficiency analysis, taking a forward look at what are efficiencies out there, what are opportunities. And if you’re selling property or selling a business, you need to look ahead to see how to handle that there are opportunities, you know, there’s tip there situation where maybe a charitable remainder trust could be useful donor advisor funds, you know, you’ve got to look at impact or how to structure the cells to make that work efficiently for you these Roth conversions, where are their opportunities? One of the things I look at when we run our tax efficiency analysis is, is there any margin left I hate wasting tax opportunity there, that would be an example of somebody’s income. And let’s just use the 12%, for example, that there, you know, when it said, done their taxable income, and we’ll just call it 50,000, whether it’s 33,000 of margin left there in that 12% tax break, the why I bring that up, is, gosh, we can convert some money from traditional IRA qualified to a Roth account at a 12% bracket and allow that money to grow and create tax free benefits in the future. If you’re in the 22% bracket. And let’s say your your income is 100,000. Well, there’s 78,000 a margin there, like is there an opportunity to shift some money to create efficiency for the future? So that’s kind of one reason we do that to see where are the efficiencies? Your thoughts on what I just shared with you?

Jude Heath  07:34

Absolutely. I think anybody approaching retirement, or worried about the two things that you just talked about? If they’ve got some money left over in their bracket, there’s they’re asking the question, are our tax rates gonna go up? And given where we are with the spending, and it’s not going to go down, it’s a safe bet to assume that the middle brackets are going to take a hit, it’s not all going to fall on the on the 35 at the 37% bracket, my Gregory’s saying that at least the 20 brackets that are in the 20s are going to take a nice hit, regardless of the expiration of the lower brackets, with the Trump law sunsetting. It’s just going to take some some extra tax money to be able to take care of the of the government spending. And so we’re costing those clients that come in and say, Hey, do you think taxes are going up? I’ve got a little bit of money left over in my bracket, I’d like to think about trying to convert over. Yes, those are absolutely smart ideas. That’s something we should look at. Because every year that clicks by is the year that you left a little money on the table.

Gregory Ricks  09:02

And bn, you know one of those rules out there 872 for qualified money, you have to start taking required minimum distributions, and that’s going to escalate through retirement. So if you’ve converted that money to Roth, it takes it off the table. There’s no required minimum distributions on Roth accounts. So you’re not going to be forced to take maybe money that you don’t need. But if we’ve got opportunity, it goes to the compounding of money. If we could just say, shift 100,000 over a few years, just keep the math simple. 100,000 If you can average 7.2% You’re taking and growing tax free money you’ve taken 100,000 shifted it to the Roth side. If you could let it work for 10 years, hypothetically get that return. Now you’ve got $200,000 And if it could work another 10 years now you’ve got $400,000 If you’ve you’ve grown $300,000 of assets that Uncle Sam is not going to ever tax you on when you die and leave it on, they’re not going to tax it. And I believe everybody’s got more time than they think, you know, average, if you make it a couple makes it to 65 Average life expectancy for the males, late 80s, early 90s for the female. So when you think about your money is going to have time, and you’re going to need it. And guess what if it’s not taxed, what is it goes further down the line. So we’re Pro, taking advantage of these opportunities. So we’ve got a window. And this window we’re talking about, I just gave you 20, and I’m around the 22% through 24% is a range of 83,000 to $340,000, where there’s just a 2% difference, that you could shift money now converting it, there’s a problem with converting it, it’s going to create a tax bill. So you either have savings to pay that or you have that paid through the conversion process, take some of that money to pay the tax bill. But what you’re doing is if that if you can give that money time, you’re growing tax free money, and you got to think more, I believe on the compounding side of that. For the future. You agree?

Jude Heath  11:36

Yes, we encourage clients that are going to make this conversion to pay their taxes up front and don’t take it away from the compounding.

Gregory Ricks  11:47

Now, what is this going to in 2026? Based on law, and number articles, Wall Street Journal MarketWatch, Barron’s a number of articles on my blog reference that that blogs, the news blog over at Gregory Rick’s dot com and we regularly post up articles that I read and reference on the show. But that 22% bracket I spoke of that’s 83,200 78,000 is going to be 25% with a range of 75,250 3000. That 24% is going to 28% with a range of 153,000 to 233,000. So they’ve locked not only is that 24 going to 28. They’ve lopped 100,000 off of that bracket, and they lowered the entry point from 178 to 153. I’m not saying they’ve lowered it, that’s what it was. And it’s set to go back to how do we avoid this going back is is how does that happen? Can we avoid it? Something we can do?

Jude Heath  13:07

No. What they’ve done is they’ve they’ve sort of shorten the brackets so that you’re into the higher brackets sooner. So not only have they add to the rate, they’ve shortened the brackets, and so that that’s kind of like a double sting.

Gregory Ricks  13:23

So I don’t run out of time here. How do the listeners reach out to J Heath & Co? Well, they can call your office. Absolutely, we will hook them up.

Jude Heath  13:36

Right and then my website is Jay Heath cpa.com

Gregory Ricks  13:40

Okay. And my website is Gregory Rick’s dot com and on the winning at life page the in the media tab we have information about the show contributors and you’re one of them along with Wes Blanchard and Dwayne Stein that regularly contribute to the show. So if they’re looking for some help along those lines, thanks so much for listening to ask Gregory where we answer your financial questions. You can find us anywhere Podcasts can be found and on YouTube and Facebook Live every Saturday from 10 to 1 if you love this podcast, subscribe, leave a review and tune in next time.

Podcast Intro / Outro  14:24

And don’t forget we’ve got a complimentary download waiting for you on this topic if you go to gregryricks.com/podcast85 Again that is gregryricks.com/podcast85

Podcast Intro / Outro  14:33

Gregory Ricks & Associates is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Gregory Ricks & Associates are not affiliated companies. Gregory Ricks & Associates, The Total Wealth Authority is our trademarked tagline, it does not promise or guarantee investment results or preservation of principal nor does it represent a certain level of skill. Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Gregory Ricks & Associates is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Gregory Ricks & Associates. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Gregory Ricks & Associates is stated or implied Gregory Ricks & Associates has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. AEWM, Gregory Ricks & Associates, WJ Blanchard Law, LLC, J Heath & Co. and Mortgage Gumbo are not affiliated companies. This show is a paid placement.