Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
December 10, 2019

How much of a Roth conversion should you do and when? Does it make sense to convert to a Roth IRA all in one year, or to do it over time, based on your age? Joe and Big Al explain the reasoning behind their answer to this common retirement investing question. Plus, they answer your questions about converting from a thrift savings plan (TSP) to a Roth, limits when contributing to retirement accounts and a traditional IRA, and doing the tax math to decide if a Roth conversion is right for you.

Listen to the podcast on YouTube: 

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn

Free Financial Assessment

Show Notes

  • (00:36) Should I Convert TSP to Roth? Would I Lose My NY Tax Deduction?
  • (10:44) Can I Contribute to by Traditional IRA After Retirement Accounts?
  • (16:01) How Many Roth Accounts Can Each Person Have?
  • (18:16) Should We Convert to Roth All At Once Or Over Time?
  • (27:25) I Would Pay Significant Capital Gains Tax from Selling Stock to Pay Roth Conversion Taxes. Is a Conversion Still Right For Me?

Resources mentioned in this episode:

Watch the YMYW TV show, seasons 1 through 5!

Subscribe to our YouTube Channel to watch Your Money, Your Wealth® TV show and podcast and educational videos from Pure Financial Advisors

“I would not convert” to a Roth IRA: Listen to the ONE YMYW episode where Joe didn’t think a Roth conversion was a good idea!


00:36 – Should I Convert TSP to Roth? Would I Lose My NY Tax Deduction?

Joe: Gary. He writes in from Rochester, New York. I’m just gonna jump right now.

Al: We’re gonna get right into it huh? Okay.

Joe: He goes “Hi Joe. Great show.” Because this was just specifically towards me.

Al: Oh that’s why you did this one first. I’m just going to listen to your answer then.

Joe: He goes “It’s very entertaining and educational.” He’s a financial junkie, Gary is. “Love to read and listen to anything related to financial and tax planning. Started out with a dozen radio financial podcasts. Now, this is the only podcast I listen to weekly.” Oh wow.

Al: Gary. Look at that.

Joe: “In podcast number 249-” Of course I remember that off the top my head.

Al: Yeah, we talked about Roth conversions.

Joe: Heck yes. And we probably talked about what’s the weather. Roth contributions mainly. “You subjected people rolling over their 401(k) into their brokerage IRA account when doing a Roth conversion.

Andi: Then.

Joe: I do remember that. I think Andi you and I did that show. 249.

Al: I think he means suggested.

Joe: Yeah I know. I’m just reading what he writes.

Andi: Then do a Roth conversion, yes.

Al: Yeah, but let’s get the English right. You suggested people roll over their 401(k) to a brokerage account.

Joe: to an IRA. And then do a Roth conversion.

Al: Okay, Thank you.

Joe: And then Gary said to himself, wow this is brilliant.

Al: Right, great idea.

Joe: “As a federal retiree it’s a pain in the neck to withdraw money from a TSP. You need to fill out a bunch of forms, get it notarized, and a fax and blah blah blah. It’s time-consuming. When I just about to follow your advice something is telling me this may not work for me and my wife. We are both 59. We live in Rochester, New York. I know New York doesn’t tax my TSP distribution. However, if I roll over my TSP into a brokerage IRA then convert it to a Roth, I will lose the New York tax exemption.

Al: Will I? Question mark.

Joe: OK will I? We still have $1,400,000 in TSP, needed to be converted, $400,000 in Roth, $150,000 cash reserves. I may go to the top of the 24% tax bracket this year so I can convert everything before the GA & TA ends.”

Andi: Tax Cuts and Jobs Act of 2017.

Joe: Ahhh. I love it. “in 2025. We will collect Social Security at age 70 with our pensions. We’ll probably don’t need much more of our TSP savings.” So he’s going to live off of Social Security and pensions Big Al. “Keep up the good work. P.S. I’ve come from a long way. Came to the U.S. in 1982. Didn’t speak any English. Worked in a Chinese restaurant 12 hours every day. Hated it.”

Al: Hated it. Don’t blame ya.

Joe: Wow. I love it. Just smell that Chinese food all day 12 hours. I’d just be so fat.

Al: All day.

Joe: That’d be awesome.

Al: What would you eat? The kung pao chicken or the sweet and sour pork?

Joe: Oh everything. I don’t care.

Al: At all.

Joe: Yeah. “I went to college 1994, joined the postal service with his wife in 1998 took the road less traveled. It made all the difference in the world.” Well, Gary, congratulations on your terrific success and I believe it was that Chinese restaurant for 12 straight hours-

Al: That was the start. Gave him a great work ethic.

Joe: Yeah it was like get me the hell outta here.

Al: I’m gonna go deliver mail.

Joe: Are you a big Chinese food fan?

Al: I used to be.

Joe: I couldn’t eat it.

Al: I used to be and then I became a vegan so it doesn’t normally work.

Andi: You get the veggies.

Al: I guess I could. But they’re also, it’s loaded with oils and stuff.

Joe: Do you get like to throw the vegan card out all the time?

Andi: It affects what he eats, Joe. It’s pretty much everything.

Al: Since you asked me.

Joe: Say “well, I’m a vegan.”

Al: That’s why I’m going to live longer than you, even though I’m 17 years older.

Joe: “Because I’m a vegan.”

Al: That’s right.

Joe: Oh boy. All right let’s answer Gary’s question.

Al: So he’s thinking get the money out of the TSP to his IRA.

Joe: Because I remember the show. What my recommendation was that you don’t have to take the money out of a 401(k) or TSP to do the conversion. You could directly convert from a retirement account into a Roth IRA. No big deal. But it’s just kind of a pain in the neck. You’ve got to fill out forms. You’ve got to do all this other stuff. I said if it were me, I would move it from my 401(k) into an IRA and then have my Roth IRA at the same custodian.

Al: So it’s much easier.

Joe: It’s much easier. I’m just saying convert $20,000 from this IRA. Put it in this account. Boom. I do it online. It takes me five seconds and it’s over. And so he’s like yeah. Gary’s thinking, Joe smart guy. Al: Right. Brilliant.

Joe:  But then he’s like whoops-

Al: Maybe it might not work for me.

Joe: Well Gary just FYI, I live in Southern California. I live in San Diego. So I’m not up to speed on New York tax law.

Al: But you did some research.

Joe: No. I just know this.

Al: I beg to differ.

Joe: I don’t wanna put me out there as the source.

Al: What do you know?

Joe: But I believe it’s a deduction. He’s saying, “do I lose my New York tax exemption?” Yes, you would. It’s out of retirement accounts. You get $20,000 deduction, if you’re married it’s $40,000 and it comes from all retirement accounts, not specifically the TSP, what my understanding of the law is. So would he lose it? My understanding is no. But I could be wrong. I would contact a tax attorney or a tax specialist.

Al: Yeah. Don’t listen anything Joe’s saying. The answer is we don’t know.

Joe: I know that there’s a deduction you get.

Al: So here’s what I do know. If you’re in a company pension plan in the state of Hawaii, it’s tax-free. I do know that.

Joe: And if you go to Guam and order a chicken-

Al: Gary if you move to Hawaii, it’s still a TSP.

Joe: “But here’s what I do know. I’m a vegan.”

Al: I’m lightheaded. Give me a break. No-

Joe: Gary, I have no idea about the tax law in New York, but what I do know, is when I move to Hawaii soon-

Al Yeah, that’s right.  It’s coming up. Anyway. Yeah. Check with a local expert on that one. Because if there is a benefit that you’ll lose from doing this you may not want to do it.

Joe: Then you don’t wanna do it.

Al: And you’re right to sort of take a pause on this.

Joe: But here’s what I would do. That he’s got $1,400,000, I believe is what he said.

Andi: In his TSP, yep.

Joe: And it’s still in his TSP. So maybe he does, I don’t know, how old is he? 59. So he’s got another 10 years he doesn’t need the money. He’s living off of Social Security and pensions. Maybe he moves $700,000 of the $1,400,000 into an IRA. He keeps $1,400,000 in there. He converts the $700,000 over a 10, 11 year time period or before the JATA, the Jobs Act,

Andi: TCJA. Tax Cuts & Jobs Act, yes.


Andi/Joe: Jobs Act Tax Act.

Al: We knew what he meant.

Joe:  Expires in 2025. So he could take a partial. So just to keep his conversions kind of easier, versus if he’s going to do let’s say the top of the 24% tax bracket. That’s a pretty big conversion, Gary.

So just kind of take a look. And say how much money would I want to convert over the next 10 years? Maybe you take that out of the TSP. You move that into an IRA. You keep X amount of dollars in the TSP. So you won’t lose any type of tax exemption, that he believes he may have by keeping it in the TSP, which I believe it would still work in an IRA. It’s just a tax deduction from the State of New York.

Al: But we’re not sure.

Joe: But no. Don’t quote me on that. Please consult your tax advisor.

Al: Now if you have a California question, or Hawaii.

Joe: But a couple of other things. They changed the law on TSP when it comes to taking distributions out. It was like you have one year to do it. Well, you could only take a distribution once a year and there were all sorts of different types of restrictions.

Al: Sure.

Joe: So they changed that. But there were some surprises that I saw.

Andi: Now this is federal, not just New York right?

Joe: Yeah, federal. So with TSP, some drawbacks remain here. There is no stretch option in a TSP. Did you know that?

Al: Did not.

Joe: So in an IRA if you pass away, the beneficiary can stretch out the tax liabilities over the beneficiary’s life expectancy.

Al/Joe: Currently.

Al: That may change next year.

Joe: That could change. But right now if good ol’ Gary passes-Hopefully not.

Al: Yeah. But if he does-

Joe: He’s got $1,400,000 in the TSP plan, his beneficiaries may not be able to stretch that if they’re non-spouse. So I thought that was like they could they can’t do a 72T tax election. In a TSP you cannot do a straight to charity from your required distribution.

Al: Qualified charitable distributions-

Joe: out of a TSP.

Al: OK. Look at you.

Joe: A few other things to consider-

Al: Is that a recent article you’re quoting or is that something written 10 years ago?

Joe: This is November 2019.

Al: Okay. We’re up to date. Just asking.

Joe: You’re solid. So if you’ve got money questions don’t ask us.

Al: Please don’t ask us.

Joe: Only if you’re from Hawaii.

Al: Yeah I’m good at that. Okay. So we got like 12 pages of e-mail questions. So where do you want to go?

Joe: Well let’s talk to Andi. Where does she want us to go? Because she put it all in order and then we blew it up with Gary.

Andi: Totally blew the whole thing up.

Al: We started with page 5. You wanna go back to page 1?

Andi:  I was going to say, why don’t you stay on page 5 and do Zisi from Washington State?

Joe: Okay Zisi from Washington State.

Al: Let’s do it.

Joe: I don’t even know where the hell page 5 went. Got it. Boom.

10:44 – Can I Contribute to by Traditional IRA After Retirement Accounts?

Joe: Zisi. Zisi. That’s kind of a cool name.

Al: It’s a great name. From Washington state.

Joe: “Hello Joe, Big Al and Andi. I have a question regarding 401(k) and IRA. I participate in my company defined contribution plans, Roth 401(k) and after-tax contributions within the plan. This year my contribution and company match will total $62,000 which is the maximum allowed. With that in mind, can I also contribute $7000 to my traditional IRA on top of the $62,000 that I have with my employer? Thanks for the great educational show.” Zisi. Well, first of all, Al let’s talk about the $62,000 she is claiming she is contributing to her plan.  Because most people-  even our 401(k) provider would be like, “You’re crazy!”

Al: They wouldn’t let us do it. They told us we couldn’t. So let’s talk about that. So, first of all, an individual can contribute $19,000 to their 401(k). And then there is a $6000 catch-up if you’re 50 and older. So $19,000 plus $6000 is $25,000. That’s the amount you can contribute. That would be either to a deductible 401(k) or traditional or to the Roth 401(k) or any combination getting the $25,000. Now, then if your employer does a match and/or a profit-sharing component to this it can get as high as $56,000 in total going in for you. So you contribute, so let’s say $25,000 if you’re 50 and older and then the employer can get up to $56,000 actually if you’re under 50 and if you’re 50 and older, $62,000. But there is another way to do it which is not commonly known. And that is some 401(k) plans allow after-tax contributions to get up to that $56,000 or $62,000. And it looks like that’s what’s going on because in parentheses, (Roth 401(k) plus after-tax contributions within the plan.)

Joe: So Zisi, she’s or he-

Andi: Yeah we’re assuming Zisi is female. I’m not really sure.

Joe: I don’t know either. I don’t know. Whatever. Zisi.

Al: So one thing we know about Zisi is he or she is over 50.

Andi: Because that extra $6,000.

Joe: So this is a really cool strategy that Zisi is doing.

Al: Yeah I agree.

Joe: It looks like Zisi’s putting the money into the Roth and Zisi please write me back to see if you’re a boy or girl, or male or female, or you could be whatever.

Al: Cracking yourself up today.

Joe: Right? And so what Zisi can do, so Roth 401(k) plus after-tax contributions within the plan, so those are after-tax dollars. So what you can do with after-tax dollars within 401(k) plan because they’ve already been taxed you could convert those directly into a Roth IRA with zero tax due because you’ve already paid tax by going into the plan. So it’s a giant way to get a large amount of money into a Roth IRA. We call it like the garage back door, you know it’s the garage door.

Al: I think it has a different name but I forget what they call it.

Joe: It’s a giant backdoor Roth.

Andi: Mega Roth? Mega backdoor?

Joe: Mega Roth door.

Al: Mega, that’s the word. Mega Backdoor Roth. That’s what it’s called. So at any rate, it sounds like $25,000 is going into the Roth 401(k) and then X number of thousand dollars to get to $62,000 is after-tax. And you’re right. So that can be converted directly to a Roth IRA. It depends upon your plan how soon you can do that though. Because if you’re 59 and a half and your plan allows in-service withdrawal you can do it each year. But if you’re under 59 and a half and your plan does not allow in-service withdrawals up to that point you may not be able to do it.

Joe: Yeah it’s always up to the plan document. And then I guess her main question or his main question is $7000 into the IRA.

Al: Yeah you can do that.

Joe: Of course.

Al: Sure. Because it’s a different number, a different limitation than the $62,000. So yeah go for it.

Joe: It’s all up to adjusted gross income in age at that point.

Al: So you have to be under 70 and a half.

Joe: And then so if you’re under 70 and a half he can still contribute to a traditional IRA. It sounds if you’re putting $62,000 away, probably a high wage earner for someone to save that much money into a 401(k) plan.

Al: Could be. Yeah.

Joe: And then from there you’re not taking the deduction, then you could do a conversion from the $7000 non-deductible into a Roth if you’re doing that. So yeah you can definitely do the traditional IRA or a Roth IRA, depending on your AGI limitations.

Al: Correct.

Andi: Let’s go to page 1.

Joe: 1. Could you just-?

Andi: Would you like me to ask the question?

Joe: No.

Andi: OK. I would like to go to Helen.

16:01 – How Many Roth Accounts Can Each Person Have?

Joe: Helen.  “Good morning Andi. Love to see Joe and Big Al on TV again.” Well, thank you, Helen. I don’t think we’ve left.

Al: Yeah, we’re still there. We’re on reruns.

Joe: “Glad don’t have to wait until January of next year. How many Roth IRA accounts each person can have? Thank you. Have a great day.” You can contribute to as many as you want but there’s the dollar figure that’s what’s important.

Al: Well if she’s asking can you have more than one Roth account. The answer is yes. You can have 100 Roth accounts. But in terms of what you contribute, that’s based upon $6000 unless you’re 50 and older then it’s $7000. But yeah, you could have 10 different Roth accounts if you wanted. I can’t really think of a reason why you’d want to but you could if you wanted to. There’s no limitation on the number of Roth accounts that you actually open up but there is a limitation to how much you can fund into a Roth on an annual basis. And that’s at $6000 or another $1000 catch-up if you’re 50 and older.

18:16 – Should We Convert to Roth All At Once or Over Time?

Joe: Okay. Let’s go to Leeann.

Andi: Lynné.

Joe: Lynné. From Alaska.

Al: Alaska. Maybe what would, probably Anchorage. That’s where most of the population is.

Joe: Could be. “Hi, guys. Thanks for broadcasting your podcast. So much of I want you-“

Andi: “So much of what you discuss pertains to me.”

Joe: Thank you. I was just thinking about Al’s comment. “I have a follow-up question from a recent podcast regarding Roth conversions.” Imagine that, Al. We talked about Roth conversions on the show.

Al: It’s hard to believe.

Joe: “My husband is 53 and I’m 49. We are self-employed and we have $1,500,000 saved and about $320,000 in Roths, about $800,000 in IRAs, $250,000 in a money market?

Al: Yeah, I’m gonna say money market too.  It just says M.M.I. – Money Market Investment.

Joe: Yes. OK. “And in individual stocks $100,000.” So let’s see and a few other accounts, HSAs, they also have $1,000,000 in real estate, “part of our self-employment is vacation rental property we own and manage ourselves, brings in about $100,000 annually net. My husband is the remodel construction business. We do not plan to retire. Close our vacation rental property when we get older but my husband will slow down on the remodel business in about 5 years. Our annual income is about $200,000 and we have zero debt. All properties are paid for. We have a 19 and 16-year-old. College, for the most part, is saved and we will pay for whatever we haven’t saved directly. No loans. On average we spend about $80,000 per year on daily living and have invested about- oh, so they “invest about $15,000 to $30,000 into retirement accounts. We are interested in converting our IRAs to our Roths and would like to know if we should do that all in one year, over 5 years, or what period of time we should do that based on our age. I hope I gave you a good enough background for a fun-filled answer to our question. Thanks again for making this podcast.”  Lynné. Great job. First of all 53, 49, $1,500,000 saved in liquid assets plus another $1,000,000 in real estate.

Al: That’s fantastic.

Joe: They probably look like Joanne and Steve. What’s his name? Fixer Upper? He’s the remodel guy. She’s working on the business. They’re self-employed.

Al: Oh yeah, yes I know who you mean.

Andi: I have no idea what you’re talking about.

Al: Is it Chip?

Joe: Chip. Chip.

Al: Chip. Yeah, Chip and Joanne.

Joe: Chip and Joanne. Come on Andi. Get with the times. Yeah. They’re from Texas. They’re the Alaska version of Chip and Joanne. But it’s Leeann and-

Andi: Are these TV people or is this-? No, it’s Lynné.

Joe:  Lynné.

Andi: Get with the program, Joe.

Al: Chip and Joanne do fixer-uppers in Texas. It’s actually a pretty cute show.

Joe: So the husband, he’s a remodeler, he buys the properties, fixes them up, and she’s doing the vacation rentals. Yeah. I love it.

Al: Yeah yeah. Making lots of money. So they make a couple hundred thousand dollars a year which is fantastic.

Joe: Killing it.

Al: Killing it. Now if they live in Anchorage, that’s kind of an expensive place to live but they’re still saving a lot. They’re living on about $80,000 a year. That’s fantastic.

Joe: So the question is. So 49 and 53. Going to retire. He’s going to slow down a little bit in the next 5 years. So they’re going to retire young. Or slow down. But they’re not going to give up the vacation rental so that’s still going to bring in cash flow.

Al: They still have that and he’ll probably maybe do some fixer-uppers but maybe not as much. Well, first of all, let’s go over the IRAs. So there’s $815,000 in IRAs and of that, about $465,000 is inherited. You cannot convert an inherited IRA. You can only convert your own IRAs. So we’ll get that on the table right away. So that’s a little under $400,000 that’s available to be converted.

Joe: So $200,000 of income. So the question is maybe we look at conversions, converting this to a Roth. How much? Should they do it all in one year? What are the things that they gotta be looking at?

Al: Here’s what you might think about. First of all, do not do it all in one year because you’ll be in too high of a tax bracket. But with this new Jobs and Tax Cut Act that we just had in 2018, the 24% tax bracket for a married taxpayer goes up to about $320,000. OK so let’s just do the math. If your income is $200,000 and I’ll just say you’re using the standard deduction, we’ll just round it to $25,000. So that means your taxable income is $175,000. So you could convert right close to $150,000 and still stay in that 24% bracket. Now you only have $400,000 or so to convert. So we’re not talking a ton. So you could do that much or you could also kind of stretch it out over a little bit. The taxes that we have right now are supposed to be in effect till 2025. So there are a few years to do this and I would think that would be probably a good idea. But there again you can only convert your own IRA, not the inherited IRA.

Joe: So at 49, 53, they’re going to slow down work in 5 years. We would probably want to take maybe a deeper dive in the tax return because they’re both self-employed. So there’s net income and gross income, there’s deductions and things like that. So you’re just kind of the back of the envelope. They could be in a lot lower bracket, in a sense it could be in the 22% and maybe you would just want to convert to the top of the 22%. So what we would say is look at line 10 on your tax return. And then that tells you what taxable income that you’re in. And then you could go to the IRS tables and see how much do you have room? So it’s about $180,000 to the top of the 22% tax bracket.

Al: It’s about, what $170,000. I think, ish.

Joe: $178,000?

Al: Something like that.

Joe: You got the sheet in front of ya? Yeah, I’m calling it $180,000. And then-

Al: Oh you give it to the old guy that can’t read.

Joe: Then I would convert maybe for sure to the top of the 22%.

Al: $168,000. So see I think they may already be in the 24%.

Joe: I don’t know that.

Al: But here’s the thing. In terms of being self-employed, you may potentially be able to do a much bigger retirement account. Then you could take some of your money market and then just basically jam that into a retirement account and convert that at no cost. Because you’re getting a deduction and then you get the conversion. So that could be- We’ve done that a lot with self-employed business owners.

Joe: Sure. You have $250,000 in cash but maybe that cash is there to support the business.

Al: Maybe.

Joe: If it’s not, if it’s there for retirement then you could set up a solo 401(k) plan. You could set up a defined benefit plan. You could do all sorts of different things in regards to your self-employment and in retirement. So set that, get your taxable income down low enough and then you could do a fairly good sized conversion.

Al: And to go even deeper, the best way to answer this question, how I guess we would look at it is what are your tax brackets for the next 15 years or longer? And that’s going to help you decide how much to convert because Joe, we get this question all the time. Should I convert over 3 years? 5 years? 1 year? And it’s different for everybody depending upon tax brackets. And we do have sometimes people call us and they’ll say well you guys always recommend Roth conversions and we don’t. There are lots of cases where we wouldn’t. But in this particular case because the tax rates are lower than they have been actually in virtually any time in my career there is some real opportunity to get dollars converted in low brackets even in the 24% bracket.

Joe: They’re young. You know what I mean? So you take some 22%, 24%? Last year, or 2 years ago, they’d probably been definitely in the 25%, pushing to the 28% tax bracket.

Al: Alaska from my recollection is fairly high. No actually, I was gonna say high taxes, it’s not. I think it’s a tax-free state. So they don’t have a lot of high taxes so they probably wouldn’t be subject to alt-min, but they would be probably in the 25% or 28% tax bracket under the old tax law.

Joe: Which is going to revert back in 2025.

Al: That’s right. Exactly.

Andi: Yeah, they do not have an income tax.

Joe: Well hopefully that answers your question. But you know it’s all vague, it all depends.

Al: That’s always the answer.

Joe: You know what I mean? How long you gonna work?

Al: We just start talking and then we end up with ah forget it.

Joe: Yeah, I don’t know. Don’t ask us.

27:25 – I Would Pay Significant Capital Gains Tax from Selling Stock to Pay Roth Conversion Taxes. Is a Conversion Still Right For Me?

Joe: All right we got Dan from Pennsylvania. “I love your podcasts. Listen regularly. They are very informative.”

Al: He’s probably talking about another show.

Joe: I know. I was just gonna say that. “You speak frequently about Roth conversions-“

Andi: That’s YMYW.

Joe: “- and there seem to be very few circumstances where you recommend against them.” Well, Dan, you’re absolutely correct.

Al: I can think of many which I’ll go over it in a bit.

Joe: “I wonder how you feel about my situation.” Okay. Let’s see what you got. Danny Boy. “66, recently retired, fixed income, pensions and Social Security. Dividends are about $140,000. Got a traditional IRA valued at $2,300,000. If I were to convert all the money used to pay the taxes would come up from my retail accounts which all have approximately 2/3 of their value. Capital gains would, therefore, incur significant additional taxes. In addition, my Medicare premiums would be subject to surcharges totaling as much as $525 a month for my wife and I in the years we would do this. Does this still work for me? If so what is the right amount to convert each year?” What, so is he retired? Yeah, it sounds like it. $140,000.

Al: “66, recently retired pension and Social Security and dividends about $140,000.” That’s fantastic. That’s a great start. But he also says he’s got a traditional IRA valued at $2,300,000. We know at age 70 and a half Dan is going to have to pull money out and at a 6% rate of return, that’s going to be close to $3,000,000. I’m guessing. Is that what you’re getting? At $3,000,000 then your required minimum distribution is about $120,000. So now between that and your $140,000 now you’re at about $260,000 of income. So you’re talking about higher Medicare payments. Well, that’s for life. I mean you can’t really avoid it.

Joe: You’re done, Dan. $520.  The $175 you’re enjoying today?

Al: Yeah. It’s not going to last very long.

Joe: You’ve got 4 more years of that.

Al: But what Dan’s talking about is, at certain adjusted gross income levels, you have to pay higher Medicare taxes. There’s a 2-year look-back. So right now in 2019 people are paying from what their income was in 2017. So and just so you know what those adjusted gross income amounts and is Dan married?  Did he say?

Joe: Yes.

Al: OK good. So being married, then I’ll just go over a couple of them. If you make $170,000 or less then you’re in the lowest Medicare bracket and your part B premiums $135 and your part D which is for the drugs is at zero. If you get over $170,000 to $214,000, I’ll just do Part B, it gets to $189. If it’s over $214,000 but below $267,000 it’s $270. $267,000 to $320,000 of income it’s $352. The point is the more income you make from 2 years ago it’s going to impact your Medicare premiums. But I’m going to say this Dan you’re going to be in these high Medicare premiums regardless of doing nothing. So what might be a smart thing to do is to maybe you convert up to just a gross income of $267,000 let’s just say, to keep out of a potentially higher Medicare bracket.

Joe: Probably $250,000.

Al: Honestly when you do the math though that extra Medicare taxes that you pay compared to the lower tax brackets that we have today I don’t think you’re going to make me want to have a different decision. Now on the other hand if we were in the old system in 2017 and before, this would put you into alternative minimum taxes probably. And so I would probably have a completely different answer.

Joe: So another concern of his though is when I convert I got to pay the tax from my brokerage account and then he’s got capital gains tax that he’s worried about. So you don’t do anything, you’re just going to pay a lot more ordinary income tax.

Al: Yeah, later.

Joe: So then you got to look out, maybe you do $250,000 or something less. Just to stay out of the net investment income tax.

Al: Yeah that’s another good threshold. And that keeps you under the $267,000 for that next Medicare bracket. And so the $250,000, once you’re over $250,000 as a married couple, Adjusted Gross Income, now you have to pay an extra 3.8% Medicare surtax on your passive income, which is interest, dividends, capital gains, rental income, and the like.

Joe: I guess it’s Dan’s belief to look at if tax rates stay the same or go up, it probably makes sense to do conversions. If he believes tax rates are going to go down then don’t do them.

Al: That’s always true.

Joe: In his situation, he’s a prime candidate. I think he was focusing on- a lot of times too people trip over dollars to pick up pennies?

Al: Yes. I think that’s how you say it.

Joe: And I think that’s might what Dan might be looking at because he’s was like well if I convert the whole thing $2,300,000 is going to cost me- you would never want to do that.

Al: Let’s go over that just briefly. We would almost never recommend converting your entire IRA. Because what would happen is it would put you in such a low bracket you pay taxes at a much higher rate to stay in a much lower rate. What makes more sense is to convert enough just to stay out of higher brackets but you want to have enough IRAs and required minimum distributions to fill up those lower brackets. I think that’s a huge misconception. We really don’t advocate converting it all. It’s just how much you convert is going to be based upon your tax brackets today versus in the future. Like I just- give you an example- I was just talking to a person where when we look at their retirement income, her retirement income, single taxpayer, she was barely in the 22% bracket at age 70 and a half. And then by doing just a few conversions, now we can have her retirement income be at the top of the 12% bracket. So it’s just enough conversions to stay in a lower tax bracket in the future.

Joe: Right. There are so many different variables. I get it, Dan, because I think we’d like to talk about certain strategies that make the biggest impact on people’s lives. And we talk about stories in regards to taxes, Roth conversions, and blah blah blah so might sound like that’s all-

Al: We talk about?

Joe: We want people to do? But people just hear snippets of stuff too and they’re like oh maybe I should do a conversion and it’s the absolutely wrong thing. So giving us more details such as you have so eloquently here, I think you make for a prime candidate to do a little bit of a conversion.

Al: But not all of it.

Joe: Not all of it. No. Did you want to say something?

Andi: No. That was it. I was just pointing out there’s a couple of short things that you could do if you have 30 seconds or something.

Joe: I thought Alan was going to, because he likes to continue on. I was doing this to her not to you.

Al: You were already giving me the-

Joe:  No no no. I was saying to her, I was like no I’m not going there because Big Al wants to finish his story.

Andi: Too much sign language.

Al: I wanted to, but you cut me off.

Joe: All right. Great question. Andi, great job. Big Al, wonderful as always. We’ll see you next week. The show is called Your Money, Your Wealth®.


(Enter outro text here)

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn


Your Money, Your Wealth® is presented by Pure Financial Advisors. Sign up for your free financial assessment.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.