When Should You Consider a Roth IRA Conversion? [Video + Transcript]

Hi, I’m Amy Novakovich of Nova Wealth Management. This is more of a message rather than answering a question like I normally do, but this is a message to those that have been running to convert their IRAs to
Roth IRAs. I would ask you to consider a few different things.

When you’re thinking of converting a Roth, which by the way is not necessarily the right thing for everybody. Consider, first of all, if it’s a priority for your children or your heirs to pay taxes on your inheritance or not. Because many people will say “I do not want my children to inherit any sort of taxation. I want them to inherit my legacy. They don’t have a ton of money, I just want them to get as much money as possible.” This should seriously go into considering a Roth conversion because the Roth is inherited tax-free.

Now they must still take the money out in a 10-year period, but they won’t pay taxes. So that was changed in the Secure Act. They used to be able to take their time on taking the money out. Now it will now be 10
years. So, they won’t pay taxes on it versus a traditional IRA, they will pay
taxes on it and they will have to get it out in the same time frame of 10 years.

The second thing I want you to consider is your longevity meaning how long, nobody knows how long they’re really going to live, but if we’re trying to make an educated guess we would look at our family members, we would look at our life habits, we would look at our overall health things like this to determine how long are we going to live. Because if we convert to the Roth, we’re not going to have required minimum distributions, which is the minimum amount you must take out of a traditional IRA from the time you turn age 72 every single year. And every year that you get
older it’s more and more money, percentage-wise, that the IRS says you
must take out. So, if you’re going to live a long time. those RMDs can get really large, right?

So, if you’re in your 90s you’re taking like, I don’t know, it’s like 10, 11, 12, percent somewhere in there. The point is it’s a lot. If you have a Roth, you would have no required minimum distributions and you would only pull what you need, if you need anything at all from your IRA money. So, that’s the second thing I want you to consider.

The third thing is kind of what I just said: how much money do you need to live from your IRA? Because if you need money to live from your IRA and you’re going to be pulling money then it’s not as much of a Roth conversion question. It’s more of a tax question because you’re going
to be taking the money out anyways, right? So, it’s not a matter of “oh man if I have a traditional IRA, I have to take out some money and if I have a Roth I wouldn’t have to”. If you’re going to need the money to
live on then it’s a question of what will my taxable income be when I’m
retired when I’m pulling money out? Because if the answer is you’re going to be in a very low tax bracket meaning you don’t have a ton of assets, you don’t have a ton of IRA money or you just don’t have a lot of expenses then you may want to take a look at keeping the traditional IRA.

Possible, again this depends, everybody’s different. So every situation will be different, but possibly keeping the traditional IRA because if you’re going to be in a low tax bracket, I’d rather you keep the tax money in your pocket because when you convert you owe a ton of taxes. So, I’d rather you not put yourself up into a higher bracket converting and paying all those taxes and just pay the taxes as you pull it out later in life, if you’re in a low tax bracket.

The other question I get is but what if taxes go up? That we don’t know and quite honestly, they have been saying for many years that taxes will have to go up. We have a very large debt, especially after Coronavirus. I understand, but there are other ways to pay down a debt other than taxation. Doesn’t mean that taxes won’t go up, they quite possibly could go up, for sure. So, that’s something you need to take into consideration, but it’s not something we’re going to know right now.

So, we’ll look at that as we go. As you do planning ongoing, you have to take a look at that but when you’re trying to make an educated guess about 5, 10, 15, 20 years in the future, a lot of times it’s just easier to assume with the information we have right now. Because we’re guessing at how much you’re going to need and how much how long you’re going to live and how large your IRA account is going to be, you’re already
guessing on a lot of information.

So, throwing in that, but what if taxes go up question can sometimes throw a wrench in your decision and it can change your decision if you are one of those that just purely believes taxes are going up and I don’t want to pay taxes. Then maybe you want to look at a Roth conversion but I would seriously consider some of these things that I’ve mentioned instead of just, I just want to convert because that’s what everybody says the Roth is the way to go and Roth is the way to go. I want you to take a look at your longevity, your overall income, what you’re going to need, things like that.

I really want you to take time to consider it. If you have any other questions, again every situation is different, so if you really want an analysis, you have to run a financial plan and you can project out the net
worth and actually see when that break-even is, of how long is it until I make up the taxes that I had to pay to convert? What age? Okay is it 80? Is it 75? Is it 85? I don’t know. It might take you many years to make back up those taxes before you start benefiting from the Roth conversion and again it depends on if you need those required minimum distributions or not. Some people do not need them.

You also can consider donating the required minimum distributions to charity so they don’t have to just go into a Roth to avoid the RMDs altogether. So, it just kind of depends on your future aspirations as well if you give to a church or your alma mater. Anyways, you may want to consider the RMD going there instead of converting to a Roth. So again, consider your heirs. Do you want them to owe taxes? Consider your age and obviously your longevity. And then also consider your income, what you’re going to need later in life and what your tax bracket is going to be.

These things will at least get you started on getting a direction of should I convert to a Roth or not. But don’t just jump right to it. It has to be different for everybody. If you have any questions, reach out. We’d love to talk.

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