welcome back to the channel and if it's your first time here you couldn't have picked a
better video to watch no matter what your income level currently you can convert an
unlimited amount of assets from traditional IRAs to Roth IRAs if you pay the taxes now
now there used to be an income cap but that tax law was changed back in 2010 to allow anyone
the opportunity to convert that huge advantage may be slipping away as a reminder if you have
traditional IRA assets you took a tax deduction at some point in the past and you will owe taxes
on those funds at some point in the future in is counting on it they're salivating at the chance to
grab a large portion of those assets as we learn in part four of this series a Roth IRA allows for
tax-free growth tax-free distributions and the tax-free transfer of those assets to your heirs
in part five we are talking about conversions a conversion is where you elect to move your assets
from your traditional IRA to your Roth IRA you pay taxes now at the historically low tax rates and
never are taxed again stick with me and i'll explain why roth conversions are so important to
the zero percent tax bracket in retirement and why the clock is ticking on this tremendous strategy
hey Colin Exelby will be here and i provide financial planning for business owners and
their families that just makes sense i own the financial advisory practice celestial
wealth management and provide advice virtually to clients all over the country
currently anyone no matter their income level has the opportunity to convert traditional retirement
accounts into roth accounts that may or may not still be the case in the future i could easily
see a scenario where congress puts a cap on the ability to convert by higher income individuals
in fact prior to 2010 the magi income threshold was only a hundred thousand dollars per household
the bill back better bill if passed has restrictions on conversions for
those with higher incomes but those restrictions don't kick in until 2032.
that's interesting because by putting that date into play what it actually
does is incentivize more smart people to take advantage of roth conversions which ultimately
raises the taxes that government is able to have over the next few years this is a good spot to
point out important disclosures the information in this video is for educational purposes this is not
specific financial planning or investment advice in addition everyone's tax situation is different
you should discuss your tax situation with a qualified tax advisor
before implementing any planning strategy so while we are still in these lower tax brackets
and while conversions are unlimited it may make a lot of sense to convert assets and pay taxes now
are you in an artificially low income tax bracket because you sold your business you semi-retired or
aren't in between jobs are you under 40 building your career and still in a low-income bracket
are you retired but not yet claiming social security are you over the age of 59 and a half
but younger than 72 then you my friend are in the sweet spot for roth conversions
you pay some tax now but then have tax-free growth and distribution in retirement
while building a tax-free legacy for your heirs in my opinion there is not a better time than now
to explore how a roth conversion can help your financial situation well actually there could be
a better time as i release this video the stock market is trading just off its record highs
but if markets were to fall more significantly it makes the strategy even better you know why
you can convert assets while markets are down pay the tax then and then get the growth tax-free on
the way back up for those who converted in 2020 during the covid pandemic they look like geniuses
right about now from february to march of 2020 the s p 500 fell roughly 35 percent
what if at that time you had your ira you converted the assets while the markets were down
and then as the market has rallied back and even beyond where it was
all of those gains are tax-free all into the future i mean if you did do that
kudos to you but that's the type of strategy i'm talking about and that could be the optimal time
to do it it's always tough to pay tax now i get it trust me i want to pay as little as possible
but if the trade-off is pay a little bit now to not pay tax in the future i will write that check
all day long but the real kicker here is that roth ira distributions don't count as
provisional income so they can't make your social security taxable i'll say that again
roth distributions in retirement do not make your social security taxable this video series is all
about creating a tax-free income in retirement it is possible to create a strategy where you
either contribute or convert assets to roth iras pay taxes over the next five years while we have
these low rates and reposition those assets for future distribution without tax that is powerful
you know what else is powerful being able to see the forest through the trees make sure you hit
that little like button on the video and smash the subscribe button hit that little bell so you're
notified when i release the next video in the series now most of us will have social security
income assuming that it's around in retirement the delay and praise strategy employed by many
allowed us to build up large pre-tax 401k and ira balances if you do nothing when you retire
and take distributions those distributions will most likely make your social security taxable
the key to a 100 percent tax-free income and retirement is to begin positioning yourself now by
converting assets systematically over time you can create a roth ira balance that can be withdrawn on
your terms not the governments without taxes and without making social security taxable
so how do you pay the tax on a conversion in most cases roth conversion tax will need to be
paid from non-retirement assets let's say you're 40 years old and last year you sold your business
and are spending this year figuring out what to do next your income is artificially low
this year so you decide to convert 150 000 of your traditional ira to a roth ira if you are
married and that is your only income this year you will be squarely in the middle of the 22
tax bracket you will owe 33 000 of taxes on that conversion and then never pay tax on that money
again but you must come up with 33 000 to pay the tax from non-retirement assets you can only do the
conversion if you have money to pay the tax that's generally why it's best to split up conversions
over multiple years and this is also the biggest reason why more people don't do conversions it's
nearsighted if you don't pay the tax bill now while you're in these low tax brackets
you and your beneficiaries will most likely pay even more tax later on all the future growth
and withdrawals as they push you into higher tax brackets another point to remember is the five
year rule if you are under age 59 and a half and convert assets to a roth ira the assets that are
converted must be held for five years before any withdrawals can occur otherwise you are subject
to a 10 penalty now if you remember from roth iras in the other videos contributions can be taken out
without penalty and without taxes these on these conversions must be held in that roth ira for at
least five years so when can you pay the tax from retirement assets well if you're over 59 and a
half you see at 59 and a half you can withdraw ira assets without the 10 early withdrawal penalty so
you could do a conversion and then withdraw more assets to pay the tax you have to be careful not
to push yourself into a higher tax bracket though with the extra withdrawals to pay the tax that's
why in my opinion the best way to convert is to pay the tax with non-retirement funds
in my opinion now is the time to consider converting your ira assets but conversions
aren't for everyone when doesn't it make sense here's a quick rundown of when a roth conversion
does not make sense first anyone that can't pay the tax on the conversion because once you convert
you commit to pay the tax now the second reason anyone who believes that their future tax rates
will be lower than their current tax rates the third reason not to convert is if you have a low
tolerance for volatility and want the assets to be in safe low yielding investments generally it
doesn't make sense to convert assets pay the tax and then not invest them in growth oriented assets
the fourth reason is something that i like to call stealth taxes these are taxes because a conversion
increases your adjusted gross income and you could raise your income to a level where you don't
qualify for certain things like medical deductions or the irma surcharge on medicare premiums kicks
in or you lose child tax credits and education credits or the taxation of social security or
even the loss of the 20 qbi deduction for business owners these are all what i call stealth taxes
and you want to be aware of them but if these are triggered it's often a one-time short-term expense
to gain a much bigger benefit in retirement the next reason you may not want to do a conversion
if you are applying for financial aid the increased income from a conversion could impact it
ira assets are generally excluded from financial aid assets but the income from a conversion is not
so you may want to wait until financial aid isn't needed another reason you wouldn't want to convert
is if you need the funds soon if you pay tax now and don't allow the funds time to grow then
this strategy will backfire conversions are not for the short term and the last reason that you
may not want to convert is that generally if you are over 72 and subject to rmds your conversion
window may be over the only funds eligible for conversion would be those above the rmd rmds
cannot be converted remember rmds are required minimum distributions notice that as i said this
i said generally because in certain situations conversions above the rmd can make sense ideally
if you have a younger spouse or beneficiaries that you plan to leave the assets to then converting
now paying the tax and allowing that tax-free growth for them may make a lot of sense every
situation is different so work with your tax and financial advisors to create your roth plan before
it's too late and if you're loving all these tax saving investment strategies make sure to watch
this video next unlocking the power of the health savings account triple tax free get clear be clear