Al: First of all I disagree with your advisor but I
think there's a better plan than even the one you have.
Joe: Okay. We’re going to Sarasota, Florida here, Big Al.
Al: Okay. Let’s do it.
Joe: We got Brad. He goes, “Hello, Joe- or Hello, Al, Joe and Andi. I love your podcast. You guys
are funny, informative, and always entertaining. I never miss an episode. My wife and I are both
retired, 63 years old, and moved to Florida from Connecticut about 3 years ago. We love CT,
but we’re not missing the winters or the taxes.” Oh, my goodness.
I’d be like, I’m not missing the winters. The winters suck.
Cold. “We drive a 2019 Ford Fusion hybrid, which we like very much. With all due respect
to James Bond, I like martinis, very dry and always stirred, never shaken.”
Al: Okay. Got it.
Joe: Look at Brad, badass from Sarasota, with the hybrid, dressed as James Bond. “I have a
difference of opinion with our financial advisor, and it relates to Roth conversions that I would
like to get your perspective on. Our retirement assets include $1,700,000 in traditional IRAs,
$220,000 in a Roth, $81,000 in HSA, and about $900,000 in a brokerage account. Our investments
are mostly balanced between stocks, bonds, and indexed funds, with cash reserves covering two
to 3 years of living expenses.” Okay, very good, Brad. Yes, very James Bond like. That portfolio.
It’s very big and sexy. “I collect a pension from my former employer of $62,000 a year. We
are deferring our Social Security until age 70, which at that time we expect around $78,000 a
year. Plus, the deferred to fixed annuity will get us right at $150,000 for lifetime income.
I want to draw down our traditional IRAs during our gap years to pay the taxes now at
our current historic low rates, maxing out the 22% tax bracket each year. Living in Florida,
we pay no state income tax. This amounts to about $150,000 of traditional IRA
distributions each year.” So he’s 63, right? And then he is bridging a gap until age 70.
So then at age 70, he doesn’t need any more money from the portfolio, it sounds like, because he’s
going to have $150,000 fixed income. I’m just assuming that that’s probably what he needs.
Al: Yeah, well, either that or with his portfolio. But the $150,000 plus portfolio would be fine.
Joe: Okay. “I’m allocating $50,000 of the $150,000 of IRA withdrawals to Roth conversions each year.
My goal is to fund Roth while using the remaining IRA proceeds and the other savings to cover our
living expenses. I plan to continue with annual $50,000 Roth conversions at least until the
current tax rates expire in 2026. Our financial advisor strongly disagrees with my Roth conversion
strategy. His reasoning is that since we are drawing down the IRA for our living expenses
during our gap years, the Roth conversions provide little benefit. By the time we are required to
take RMDs, the IRA will be depleted to the point that the RMD tax will be inconsequential.”
Andi: Inconsequential.
Joe: Yes.
Andi: Without consequence.
Joe: Yes.
Al: Yes.
Joe: Those big words always get me. “We feel it’s better to leave the
money in the IRA and allow it to grow tax-deferred until it’s needed.” Okay.
Al: Okay.
Andi: He feels it’s better. The advisor does.
Joe: Oh, Okay. Yes. “I’m not sure if I agree with our financial advisor on this.
We’re maxing out the 22% tax bracket with our IRA distributions anyway,
and I see little harm in directing some of the money to the Roth. The Roth will give us
financial flexibility and the opportunity to pass tax-free assets to our heirs. Appreciate
if you could spitball this for me. Thanks.” All right. Brad aka James Bond. What do you think?
Al: Well, first of all, I disagree with your advisor,
but I think there’s a better plan than even the one you have.
Joe: I agree. 1000%.
Al: Because you have $865,000 in a taxable brokerage account. Wouldn’t it make more sense to
live off of that for a while and do $150,000 Roth conversion? You got money to pay the taxes, Now
you end up with a lot more money in a Roth IRA. And then retirement at age 70 is much better from
a tax standpoint. Remember, you’ve got $150,000 of fixed income, which is already going to put you in
the 22% bracket currently, which will be 25% here by 2026. So any RMD that you have on top of that-
Joe: – if it’s $1, it’s going to cost you-
Al: -25%. And you’re probably going to approach Alternative Minimum Tax,
which will be more like 28% or even 35% because of that stupid expense
that gets phased out with increased income. So you’re actually going to
be in a pretty high tax bracket. You want to get as much into the Roth as you can.
Joe: Yep, I would agree with that 1000%, because let’s say you don’t do anything.
You let the IRA defer. Okay, so it’s $1,700,000. He’s 63 years old. In 10 years,
he’s 73, where he has to take his required distribution. So what do you think that’s
going to be worth? Like $3,000,000? Let’s say it could be even worth more than that.
$3,500,000. So his RMD at that point is going to be $120,000 on top of his $150,000 income.
Well now he’s blown up. It’s like, well, don’t touch the RA until you absolutely need to. That’s
the advice a lot of advisors give. Because why do you think- and I’m not going to blow up his
advisor because I’m sure he’s a very good advisor and he’s helping out Brad, but a lot of times
advisors won’t recommend this. Because if you do a Roth conversion, what happens to the portfolio?
Al: Yeah, it gets reduced.
Joe: It gets reduced.
Al: Because you have to pay the tax.
Joe: And how are advisors paid? On the amount of the portfolio.
Al: Correct.
Joe: So if you’re converting money into a Roth IRA and you’re taking additional money out of
the portfolio to pay the tax, you are going to be better off. But the advisor may not be
better off because there’s a lower balance. I’m not saying that he’s thinking of this by
any stretch of the imagination, but it’s true. It’s like, you look at it, it’s like a little
bit more work for the advisor. It’s like, well, you know what, why even bother? Just
let it continue to defer. You know? It’s going to be great, it’ll be fine. And then you’re 72
years old and all of a sudden you’re going to get your butt kicked by a huge tax bill.
Al: So I’m going to take the advisor’s side here just for a second, okay? Just for fun.
So he’s thinking that if $150,000 gets drained from this account over the next 7 years,
let’s call that $1,000,000. And so you had $1,700,000, you’ve drained out $1,000,000,
now you got $700,000. Of course it’ll be higher because of growth. Assuming the market grows.
So let’s say you got $1,000,000 or maybe a little more, but let’s just say $1,000,000.
But even $1,000,000, that’s at a 4% RMD rate, which is roughly what it is in the first year.
That’s a $40,000 additional income that sits on top of your $150,000 that you already have. Not
to mention whatever kind of income you have from your brokerage account. So you’re probably going
to be an alternate minimum taxes with the old tax rates coming back, although you live in Florida,
so maybe not. But anyway, you’re going to be 25% to 28%, potentially even 35%, versus right now-
Joe: at 22%-
Al: -22%. I would do the conversions.
Joe: All day long. Or blow them out and do the $50,000 conversion. Who cares? If you do $50,000
conversion over the next 10 years, that’s a lot of money sitting in the Roth that will compound
tax-free forever. So why would that be a waste of time, right? Let me do some quick- over 8 years.
Let’s say he does $50,000 over 8 years. All right? And then let’s say the market grows at 6%. Now,
he’s got $524,000 sitting in the Roth IRA and he is going to be 70 years old.
Al: On top of what he starts with, which is $200,000, which will grow also.
Joe: So let’s call it $800,000 sitting in a Roth. So let’s see,
then that grows for another 25 years at 6%, right? So that’s a couple of million dollars
compounding 100% tax-free, right? No, that’s not worth it. Don’t do it.
Al: It’s peanuts.
Joe: What does his advisor advise on? Just multi-billion dollar
families? Come on. I don’t know. I’m sure he’s a really good guy.
Andi:are you prepared for retirement schedule a free financial assessment with
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