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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
August 31, 2021

You’ve had enough of the 9 to 5 and are ready to punch early. Are you financially prepared for a long and early retirement? Joe and Big Al provide a spitball analysis. And of course, the ever-popular Roth IRA conversions: how much to convert to Roth, when and how to pay the tax on a Roth conversion, and why not pay Roth conversion taxes out of the retirement account you’re converting from?

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Show Notes

  • (01:04) Are We Ready for a Long Early Retirement? (Adam, FL) 
  • (08:11) Spitball Analysis: Can We Retire Next Year? (Jason)
  • (16:02) When Do I Pay Roth Conversion Tax? Can I Make One Estimated Payment and Avoid Underpayment? (Laurie, IL) 
  • (20:04) Why Not Pay the Tax on a Roth Conversion From My IRA? (Hong, CA)
  • (23:54) Why Is It a Big Deal If I Pay Roth Conversion Tax From My Retirement Account? (Ellen, MN)
  • (31:00) How Much Can We Convert? (Buckeye Bill, Stow, OH)

Free resources:

Cracking the Financial Code at Any Age

WATCH | YMYW TV FIRE: Financial Indpendence or Fad?

FIRE: Financial Independence or Fad?

LISTEN | YMYW PODCAST #339: Will We Run Out of Cash for Early Retirement If We Pay Roth Conversion Taxes?

LISTEN | YMYW PODCAST #337: Why Not Pay Roth Conversion Tax Out of the IRA?

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Today’s the last day! Tell us your opinions about the YMYW podcast by 4pm Pacific time today, August 31, 2021, for your chance to win a $100 Amazon e-gift card. Click the link in the description of today’s episode in your podcast app to go to the show notes and access the survey using the word pure, all lower case. US residents only, no purchase necessary, survey giveaway closes and winner will be chosen today at 4pm Pacific time.

Now, some YMYW listeners have had enough of the 9 to 5 and are ready to punch early. Today on Your Money, Your Wealth® podcast 341, Joe and Big Al spitball on whether they’re financially ready for a long and early retirement. Plus, the ever popular Roth IRA conversions: how much to convert to Roth, when and how to pay the tax on a Roth conversion, and why not pay Roth conversion taxes out of the retirement account you’re converting from? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Are We Ready for a Long Early Retirement? (Adam, FL)

Joe: “YMYW team, I really enjoy your show. Thank you for all the information shared. I started listening back in 2019 during my one-hour commute in my 2013 Mazda hatchback. But I’ve been mostly working from home, so now listening to your show helps me mentally separate the work time from home time, since I don’t commute as much.

“I’m 37. My wife is 41. We’ve saved $2.3 million take for early retirement… $941,000 in a taxable brokerage account, $759,000 in my company 401(k) split between Roth and traditional, $383,000 total in the Roth, $95K in the state’s retirement system, and $87,000 sitting in various cash accounts… sinking funds. We’re investing about $100,000 a year in these accounts, about half of which is to the taxable brokerage accounts.

“Our primary residence is about $400,000. I have $125,000 dollars remaining on the mortgage, and we have a rental townhouse worth about $190K with no mortgage with some small, positive cash flow. We’ve been paying more to our mortgage, so it’ll be gone if we retire early, and could have it paid off in 2025 at that rate. If our tenant decides to move, I think we’ll decide to sell the rental.

“We have two kids, 10 and 8 this year. We have $224,000 total saved for their college. I have no idea how much to target here, but I know I want to pay for it in full, so we’re aiming for about $200,000-$400,000 total combined. We are only contributing $4,800 per year at the moment, though.

“Our average spending over the last several years is about $56,000 after taking out all the rental and mortgage expenses, not including health insurance deducted from our paychecks. Our retirement expense will have to add in health care taxes and maybe some increase for growing kids into expenses. Maybe $80,000-$90,000.

“Now, after the last year, it struck me that we’re possibly almost there. And expenses, withdrawal rates, and asset allocation locations have been on my mind. Our investment goals started at $2 million and has steadily grown to a more conservative $3 million over the year. Our investments are diversified stock mutual funds, some value, tilt, and international. I’m starting to think I need to move more into bonds, but what else should we be thinking about now that we’re starting to approach the end game? Do you think our asset allocation locations are generally set up for a long safety, early retirement? How much is enough, anyway? Because I keep wanting to increase our target amount.

“We know we’re very fortunate to be in this position, and we appreciate any thoughts you might share about the final few years before retirement. Thanks.”

All right, Adam from Florida. He’s spending $80,000-$90,000 a year. He is how old, like 37?

Al: Yeah, 37. Wife 41.

Joe: OK, so he’s going to retire at 40? Call it?

Al: Yeah. Financial independence, retire early.

Joe: So, $90,000, I’m going to go .03…he needs about $3 to $4 million.

Al: Yeah, probably least $3 million. So, we got that by taking $90,000 divided by .03, so that would be a 3% distribution rate. You’ve heard us talk about a 4% rate. That’s if you’re in your 60’s. When you’re going to retire early, maybe it’s 2.5 or 3%, something like that, to be a little bit safer.

Joe: Yeah. So $3 million is your, you know, that’s cutting it close.

Al: Yeah, I guess he’s got $2.3 million right now, right?

Joe: I believe in his targets, $3 million. So, if he’s going to work, and saving $100,000 a year…

Al: Yeah, I mean, might have to work four years instead of three, but I mean, you’re pretty close, right?

Joe: So I would say $3-$3.5 million. If you’re spending $90,000, I know he’s not spending that, but then there’s health care, he’s got older children… He’s not working. You’re 40 years old and you’re not working. What do you what are you going to do?

Al: Well, that’s a question, too.

Joe: So yeah, you’re right on track. When should he start going to bonds? I would start moving into bonds shortly. If your retirement date is a couple of years out… five years from retirement, five years out, that’s kind of what some people call, right? And it’s getting really close. So, I would want to be in the allocation that you need. And so here’s a good rule of thumb is that probably you want 10 years of bonds of income. So let’s say you’re spending $100,000, you want at least $500,000 out of your target, $3 million into bonds, because no matter what happens over the 10 years, you’ll still have that $100,000 that you can pull out, even though the rest of the portfolio is extremely volatile if the market crashes over that next 10 years.

Al: Yes, but that’s $100,000 for five years, right? That’s $500,000.

Joe: I mean, at 40? Yeah, I would go for what I say. Yeah, that’s right. So five, it would be $500,000. That’s what I was thinking.

Al: I mean, you can go ten years. That’s even safer.

Joe: Well, then that’s $1 million out of the three. I mean, that’s still pretty good.

Al: It’s still fairly aggressive. But at least at least what you’re spending $90,000, we rounded a $100,000, times five years for, you know, safe money for at least five years of distributions. Yeah, that would be probably a minimum.

Joe: Yup. Five, I would say $500,000 to $1 million in bonds over the next couple of years as you get to retirement. All right. Thanks for the help on the math. And thanks for the question. And congratulations, Adam. Another little five-star reward here for you.

Al: That’s right.

Spitball Analysis: Can We Retire Next Year? (Jason)

Joe: “Hi Joe and Al, love your show, and would love to have a spitball question for me. But first, my drink of choice is Coors Light. And I drive a Honda Civic. Thank you, Joe, for making me a Coors Light drinker.”

Andi: Wow.

Joe: We’re brothers.

Al: Wow, you are.

Joe: “My wife and I are both currently 55 and would like to retire next year at 56. Good genes run in our family. I want to be conservative and plan for a 4-year retirement. We own a home, $500,000 with no mortgage. We have about a million dollars in a brokerage account, $900,000 in an IRA, $500,000 in a 401(k), and $100,000 in a Roth. The investments mirror a growth in income mix of assets, with an emphasis on value equities that pay dividends. Our current combined income is about $275,000 a year. I believe we’ll need about $90,000 after tax per year in retirement. Do you think the numbers add up for retirement next year?” Did you add any of this up?

Al: I did. So it’s $2.5 million. And if you take $90,000, if that’s the right number, in a $2.5 million, it’s 3.6% distribution.

Joe: OK. “I realize I would be looking at about a 4% withdrawal rate for the next 10 years. But at ages 67, our combined Social Security will be $4,400 dollars a month in today’s dollars, which should bring the withdrawal rate down substantially. Thanks again for putting out such a great and fun show, Jason.”

All right. So what is he missing in this calculation? I think there’s just one small detail that Jason’s missing. His Social Security benefit is probably going to be off a little bit because he’s retiring at 56.

Al: Yeah, that’s a good point. See, because when you get your statement, it’s presuming you’re working ’til full retirement age to get the benefit you’re seeing on the statement. So that’s a really good point. So, even if it’s $3,000 a month instead of $4,400, it looks pretty good.
I mean, I’m going to spitball this and say, Jason, I think you can retire.

Joe: At 56 with longevity, you’ve done an awesome job. Don’t get me wrong. Couple million bucks is a ton of cash, but you’re also spending $100,000 a year, which is a pretty healthy clip. Let’s just say that the market blows up. You’ve got this growth strategy of value strategy trying to get dividends from your stocks and then you’re down 30% and you’re still pulling $100,000 a year. So you’re down, what, $600,000, plus you’re pulling another $100,000 a year. You could blow this thing up fairly quickly just because you’re pretty close to that 3.5-4% distribution at 56. We would probably like it to see a 2.5 or 3% to be a little bit more conservative.

Al: Well, I would. I would agree with you. I would say at 56, we’d rather have it be about 3% or lower, just like you said. However, the fact that there’s a lot of Social Security, regardless of what the number is, I’m still okay with it. But I think your point is you should have some conservative investments in case the market goes down. You’re pulling from those, so you let the market recover, so you’re not pulling from a down market and making this even worse.

Joe: Jason needs to plan on a retirement income strategy.

Al: I agree.

Joe: Right. So, this is just the first part of it. I think we want to look at the numbers, which is great, because before people would call and say, ‘Hey, I got a hundred thousand, I’m spending $75,000 a year, can I retire, right?’ It’s like, well, no. Don’t go for it, brother.

But now people are getting it and they’re like, OK, I understand a 4% withdrawal rate. I know that I need enough assets at least to cover that. But then now we’re getting a little bit more complex because Jason Zandt’s, 65, is 56. So we’re probably looking at more than a 2.5-3% burn rate.

And then you look at, all right, where’s the money going to come from? So, the next layers to look at taxation. So, he’s done a good job of having a little bit of diversification. He’s got $1 million dollars in a brokerage account, which is awesome.

Al: That’s wonderful. Yeah.

Joe: And then he’s got, you know, another $1.4 million in a retirement account and he’s got $100,000 in a Roth. So, his strategy over the next 10 years before Social Security should be a conversion strategy, probably up to the 12% tax bracket. But that’s going to add more dollars to his clip already of $100,000 right because he wants to spend $90,000. And if he’s going to do conversions to get that 1.5 into a Roth over the next several years, maybe it’s a 10- or 15-year plan. Yeah, it’s going to be more than that. So, his distribution rate is going to go higher because he has to pay that money to pay the tax and get it into the Roth.

Then, he has to look at a conservative income play in regards to where he’s going to pull his income from to live off of. Because of all his portfolio, is this growth value play off of dividends, you got to be careful and have to have a safety belt.

Al: I’ve got one other caution and that is it’s difficult, at least in our experience, to go from making $275,000 a year to spending $90,000. So, are you sure? So, so when I said, I think this is OK, that’s at $90,000, I’m taking you at your word, right?

But even still, with some of these factors you brought up, Jason, you still may want to have a side gig or part time work or something just to help supplement. Just in case there’s a market downturn or things don’t go quite as well as you’re thinking.

Joe: Right. And he’s probably spending $90,000 because he’s got $2.5 million dollars saved at 55. But just the feeling… he’s fine, right? If we tell him, you know, spitball back of the envelope, yeah, I think you’re good from a numbers perspective. If I was going to retire tomorrow or at age 56, I would want to really dive into the numbers to get super tight on what the plan’s going to look like.

Al: Yeah. So, you’re saying it should be more than a spitball analysis of whether you retire?

Joe: Yes. And I think Jason is smart enough to probably do that, right? But then he’s got the confidence. Then work is optional. You know, if someone writes in and says, ‘Joe, you’re jackass or whatever,’ then I’m out. I’m just going to walk out of the studio and say, ‘I’m done. I don’t care. I’ve done my plan. I’m ready to go.’ But I make $200,000 a year or Jason makes $275,000 a year. That’s added confidence. It’s like, man do I really want to give up that paycheck? Oh, that feels pretty good, even though I’m going to just put up with this B.S. another year, another year, another year, just because of that. But if you get dialed in in your overall planning and then work is absolutely optional at that point, then that gives you the confidence to kind of pull the trigger whenever you want.

Al: Yep, I agree with everything you said. But from a quick spitball, the numbers look OK, but there’s a lot more to it.

Joe: All right, good luck, Jason. Let’s get grab a Coors Light some time.

No matter how far along you are on the path to retirement, decisions you make today will affect your financial security for years to come. Download “Cracking the Financial Code at Any Age,” a free guide that will walk you through actions to take in your 20’s, 30’s, 40’s, and 50’s to create a more successful retirement – and to overcome previous financial missteps. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the guide for free. While you’re there, check out FIRE: Financial Independence or Fad? That’s the YYMW TV episode on the financial independence/retire early movement. If you’ve got money questions, comments, suggestions or stories to tell us, click Ask Joe and Big Al On Air in the podcast show notes and leave the fellas a voice message or an email.

When Do I Pay Roth Conversion Tax? Can I Make One Estimated Payment and Avoid Underpayment? (Laurie, IL)

Joe “Hi, Joe and Big Al, I love your show. It’s full of great information and fun antics. My current favorite drink is ginger ale and whiskey. Surprise, surprise, my question has to do with Roths. However, it’s not about a conversion, but rather tax implications. I understand that the amount converted will be taxed as ordinary income. So, my question is, when I convert from a traditional IRA to a Roth IRA and I’m using other money for my taxable brokerage account to cover the taxes, when do I have to pay the taxes? Do I have to make an estimated tax payment when I convert the money to avoid underpaying my taxes, and thus, avoiding the underpayment penalty, or can I pay them before April 15th? After I’ve done my 1040 tax return, will I know exactly how much I will owe? My goal is to avoid underpayment tax penalties. Also, if the answer is that I have to make an estimated tax payment, can I just send one of the estimated tax payment vouchers?

I have $1.3 million in a brokerage account, so that is by far the best option for me, paying taxes on the conversion. I can easily pay the taxes all at once and want me to spread it out over for as many tax vouchers. Thank you for your help and keep the humor coming.”

I like this answer, though, because we get this question a lot.

Al: So the answer is maybe. But so I would say, if you do a Roth conversion, you may have to pay estimated payments and those start the quarter that you’re in. So, if you make it in December, you would just have to make one estimate of payment. If you make it in March, you might have to do four estimated payments. But there’s these exceptions, right? So, in other words, if you have plenty of withholding already to cover last year’s tax, you don’t have to do estimates. I don’t want to go into all that right now. Just know that if you do Roth conversion, you may have to make an estimated payment. Just get with your accountant to figure that out.

Joe: But the rule is, what, 110%?

Al: It’s 100 %. If your withholding is 100% of last year’s tax or 90% of this year’s expected tax, then you don’t have to pay a penalty by not paying an estimated payment, even though you owe on April 15th. But if your income’s over $150,000, you got to do 110%, so there’s some nuances. But two quick points. One is, if you need to make estimated payments, yeah, you can make it all at one time. You don’t have to do four. Just make one big one in April if you want to. Second point, though, is that the goal is to avoid underpayment tax penalty. That’s an interest charge, 3%. It’s not that much.

Joe: It’s a couple of bucks.

Al: I mean, I wouldn’t even worry about it. I mean, yeah, if you need to make the estimated payments, calculate it and go pay it. But if you don’t make it, it’s not the end of the world.
In fact, you’re probably earning more than 3% in your account anyway.

Joe: Some people get very upset by paying the IRS an extra penny.

Al: I know, I get it.

Joe: All right, Laurie, thank you very much for the email.

Why Not Pay the Tax on a Roth Conversion From My IRA? (Hong, CA)

Joe: “Thank you for the information you shared during today’s session of the Taxes in Retirement.”

So, Andi, you’re just pulling everything out of here.

Andi: He emailed us a question from a webinar.

Joe: Well, shouldn’t we just reply, ‘oh, we’ll answer it like this.’

“Can you please help me with this burning question? I plan to convert $200,000 for my traditional IRA to Roth this year. This would bring my tax bracket to 24%. Should I do the Roth conversion when I do not have the cash to pay the tax due to the withdrawal? I’d have to request my financial institution to withhold 20% of fed and 10% of California. Thank you.”

Okay. There’s nowhere near enough information. Do you withhold money out of the IRA to do the conversion? And the answer is maybe.

Al: Well, first of all, you would not do it if you’re under 59 and a half because of the tax penalties. So it’s a 10% penalty for the feds. It’s a 2.5% penalty for California. So that would be dumb to pay a penalty, to pay the taxes, on the Roth conversion. It just makes that too expensive.

Joe: Right. And so be careful because I’ve seen this happen before in the past, is that someone would do a Roth conversion and they’re under 59 and a half and they just withheld the taxes.
And they’re like, yeah I’m just going to withhold. It’s like, don’t ever withhold taxes if you can afford to, because if you’re under 59 and half, then you’re going to be surprised with that 10% penalty. In this case, he’s going to be in the 24% tax bracket and he’s like, I want to convert $200,000. Where is he coming up with the $200,000? Is that going to bring them to the top of the 24% tax bracket? Or is that 100 % of his IRA?

Al: Yeah. Yeah, you’re right. We don’t know. So, assuming it’s to the top of the 24, which would be an okay thing to do, it’s always better if you can pay the tax with non-retirement accounts. The reason being is because then you end up with the full 200 or whatever the number is in the Roth, instead of the 200 minus the 30% withholding between federal and state. And furthermore, that withholding isn’t even enough to pay the tax if you’re under 59 and a half because you already said you’re in the 24% bracket and the feds have a 10% penalty, so that’s 34%, right? So now you have to go back and pull some more out, right? More penalty to pay the other.

Joe: So, here’s exactly what’s going to happen to Hong. He’s going to withhold 20% of tax for feds, 10% for state, and then, he’s going to get another tax bill in April. Then it’s like, damn it, I withheld 20%. I got to pull out another $100,000 to get 20% off the following year. He’s going to have to go back to his retirement account to pay the tax because he has no cash or any outside assets. So, he’s like, ‘Oh man, I owe $20,000 in extra tax, so he goes to the 401(k) plan, pulls $20,000 out, pays the IRS. Next year, he’s got another tax because he pulled $20,000 out. He’s got another 10%, but then pulls another 24% tax on that.

Al: At least, it’s probably a diminishing number. So each year, it’s a little bit less. 25-year process to get it paid out.

Joe: So yeah that $200,000 Roth conversion cost you $400,000 taxes.

Al: Now, Hong, if you’re if you’re over 59 and a half. So, here’s what we would need to know there, is what kind of assets do you have, what kind of fixed income, what kind of tax bracket are you going to be in retirement? Does it make sense to do this in the 24% bracket and have and pay the taxes out of that? Now, if you’re over 59 and a half, there’s not a penalty, so it would be more likely to be an OK idea, but we don’t have enough information.

Joe: Yeah. Careful with that.

Why Is It a Big Deal If I Pay Roth Conversion Tax From My Retirement Account? (Ellen, MN)

Joe: “Hi, Joe, Al, and Andi. I’ve listened to many of your YouTube videos but have never heard the answer to my question. OK, briefly, I have $1.4 million dollars in qualified accounts and will retire or cut back ours next July. I am not worried about running out of money, but I’m very worried about RMDs that will begin at age 72. That’s in January 2027. I know we are always told to pay the taxes for Roth conversions from savings, but I don’t have the savings to use since I want to keep my $50,000 cash for a down payment on a Senior Co-op.

“We always have to pay the taxes on a 401(k) IRA withdrawal. So why is it such a big deal if I pay the taxes from the account before I get the funds of the sale for my house in 2023-2024, I consider it a percentage of my 401(k) IRA belongs to Uncle Sam and not mine anyways. I don’t understand why we always hear that we need to make the money paid in taxes back to get to ground zero. The taxes were not money that belonged to me. I do not plan to need the Roth, and we’ll leave it to heirs. I will donate a portion of my qualifying accounts to charity. I have a longer version with much more detail, but would first like to know if you want to tackle this question. No one really addresses this issue, and I’ve been trying to find an answer. Thanks.” From Ellen from Minnesota.

Andi: A reluctant, retiring nurse.

Joe: She doesn’t want to retire or does she not want to be a nurse? I don’t know.

Andi: I guess she was reluctant to retire, probably.

Al: That’s how I read it, and she’s loves her job.

Joe: So I guess Ellen’s question is, is why can’t she pay the taxes from a Roth conversions from the retirement account?

Al: Yeah. And it seems like we answered it a couple of weeks ago and four weeks ago. And so, we have we actually have talked about it, quite often. So, it’s not our first choice, but in many circumstances, we’re just fine with it.

So, here’s why it’s not our first choice is it’s because, well, first of all, if you’re under 59 and a half, and you pay the taxes out of your IRA 401(k), you have to pay a 10% early withdrawal penalty with the withholding part. So that seems kind of dumb. Right? The second thing is, if you’re over 59 and a half and if you’ve got funds outside of retirement, wouldn’t you rather pay the tax with your non retirement funds because you get more money into the Roth? I mean, that’s kind of best of all worlds,

Joe: Yeah, you want to maximize the amount of money in the Roth. So if you got $100,000 conversion, wouldn’t you want to have $100,000 in the Roth and take your $25,000 in cash? You take that from another account.

Al: Yeah, if you can. Not everybody can. Not everyone has funds outside of retirement accounts, and we would say this, yes, it’s fine to do that, as long as you’re converting at a low enough tax bracket to where it makes sense. I mean, that’s actually the more important question is, should you do a conversion, and if so, how much? You want to look at your tax bracket today versus your tax bracket in 2027 when you turned 72. What’s that bracket going to be? So, you don’t want to convert in a higher bracket today to have a lower bracket later. So just do some math to figure out how much to convert. But if you’re a good candidate to convert because your tax brackets low enough and you have no funds outside of retirement, sure, go for it.

Joe: Yeah, you got to calculate the amount of tax first that you do the conversion and making sure that you keep yourself in the same bracket. Because we’ve seen this, that, you’re going to be at the tax out of the 401(k) when your IRA, whatever that you are converting, and you have like the 3- or 4-year conversion plan. And so you convert $100,000, just hypothetically, but you don’t withhold any taxes. Then next year in April, you have a $25,000 tax bill. And so, where does the money come from? You’re pulling that from the IRA. So, you pull that $25,000 from the IRA and you pay tax on that to pay the tax, and then you want to do another conversion, but you don’t have the cash to pay the tax. So, it’s just a floating thing. You’re paying tax to pay the tax, to pay the tax bill, the tax… and it just kind of free falls. So just make sure that you keep yourself in that same bracket because you don’t want to pull out more in a higher bracket to pay the tax when you did a conversion in the lower bracket.

Al: Okay, I got that.

You can listen to the two most recent episodes besides this one that include discussions of paying that tax on the Roth conversion out of your retirement accounts. I’ve linked to them in the podcast show notes at yourmoneyyourwealth.com. Now, another option is to have a CERTIFIED FINANCIAL PLANNER™ professional look over your financial situation to help you craft a more comprehensive retirement plan that’s specific to your needs and goals. In a free financial assessment, the highly trained professionals on Joe and Big Al’s team at Pure Financial Advisors can tell you if Roth conversions make sense for you. They can walk you through your options for paying that tax on conversion, and they can provide money saving insight into all other aspects of your financial life, and they can do it at no cost or obligation to you. Click the link in the description of today’s episode in your podcast app to go to the show notes and click Get an Assessment. Schedule a free financial assessment via Zoom, no matter where you are in the country, at a time and date that is convenient for you.

How Much Can We Convert? (Buckeye Bill, Stow, OH)

Joe: “Joe and Al love the show. A rare balance of great information and many laughs. I’m 60, married and recently retired at the end of August 2021. My wife was the stay-at-home mom, so no income from her. We have $1.7 million in an IRA and $200,000 in a 401(k) with a recent employer. We will live off of savings for 2022, so we will have zero taxable income. Too young to take Social Security. We don’t want to draw on IRA yet.

“We filed our taxes as married filing jointly. We’d love to roll over convert our 401(k) to a Roth IRA. My 401(k) plan does offer a Roth option. If I understand the 2021 tax tables—can’t find any details on 2022 tax tables—the high end of the 12% tax bracket is $81,050 and the $25,100 standard deduction to the total amount we can convert would be $106,150 and pay the 12% tax rate. Is this correct?”

Yes, sir.

Al: Yes, you’re absolutely correct. Right on track.

Joe: So what? What he’s doing is just taking the top of the 12% tax bracket. If you go to the IRS, and look at the tax tables for married, filing jointly taxpayers, the top of the 12% tax bracket, taxable income is $81,050. Then he’s adding back the standard deduction because he will have zero income coming from any sources, except for he wants to create income by taking money from his 401(k) or IRA to convert. And so he wants to know what is the most that he could convert and pay that 12% tax bracket. So, he’s doing the math. The top of the 12% is $81,050. And then the $25,100, you add those two together is $106,150. So yes, sir, that is correct. So, anyone else that’s keeping score, that’s the math you want to calculate.

“If so, what should I do with the additional $95,000 left in the 401(k)? Should I convert it all at once and pay 22% tax on everything above the $106,150? I’m not sure if I can do a Roth conversion from a 401(k) to Roth IRA in consecutive years or if the conversion is a one-time event. I’d be able to not take any taxable income in 2023 as well, if that helps. Thanks for your help.”

Buckeye Bill in Stow, Ohio. OK, Buckeye Bill. You can do multiple conversions.

“My 401(k) plan does offer a Roth option.”

So he’s 60, he’s retired. He’s going to retire at the end of August, at the end of this month.
So bill this what you do. You take the 401(k) dollars, you move it into an IRA. And we’re not giving advice… we’re just talking. It’s just spitballing. It’s based on what little information we have, we try our best. So just, you know, hypothetically just throw the stuff in, keep it in the 401(k), I could care less. Or you might want to think about moving it into an IRA. And then from there, you can take the money from the IRA into a Roth. You can do the full $106,150 to get to the top of the 12% tax bracket this year and do the remaining next year, and you’d pay 12% this year and 12% next year.

Al: Yeah, and you still have $1.7 million IRA. Start attacking that, too.

Joe: Yeah. So, he’s looking at the 401(k). And he’s thinking, I have a Roth option in the 401(k), so should I do an interplan conversion? So he’s got a provision in the plan, but you have to look at the plan doc to see if it allows for a conversion within the plan because some plans don’t allow an interplan conversion, even though that you can contribute to the Roth component of the plan.

Al: Yeah, I think given the situation, what I would do is I would take the 401(k) money, roll that into an IRA first. So you just have one account. Simplify it. Let’s get simple here. And then you convert whatever you want to the $106,000 to get to the top of the 12% bracket, you could do the same thing again next year. One the problems with having an IRA and a 401(k), and I know you’re only 60, so I’m going to predict that you will be 72 someday, is if you have two accounts like that, you’re going to have to have two different required minimum distributions. You’re going to have two different statements. You going to have two different investment strategies to try to follow. It just gets more complicated. Seems to me it’d be better to have it in one account. It’s, interestingly enough, when you have multiple IRAs, which I would say just get one, you don’t need multiple. But if you have multiple IRAs, you only need to take one RMD from the IRA of any IRA. If you have a 401(k), if you have five old 401(k)s, you have to take an RMD, required minimum distribution, from all five plans. It’s too much to keep track of.

Joe: Another thing, too, is that if he wants to do the interplan conversion, so he’s got $200,000 in the 401(k), he wants to convert the $200,000 into the Roth 401(k), you can do that, just understand that the Roth 401(k) will still have a required minimum distribution, while the Roth IRA does not have a required minimum distribution.

Al: That’s a good point, age 72. That’s a little known fact, right?

Joe: Right. So, so yeah, but I don’t know why he’s getting caught up. So many people get caught up in it because he has two plans, right? Well, ‘let me convert this,’ but you still have $1.7 million in pre-tax accounts. Yeah, so you still have issues.

Al: That’s the bigger issue, right?

Joe: The bigger issue, you have $1.9 million in a pre-tax account.

Al: Yeah. And that’s what you want to tackle for the next 12 years.

Joe: It’s not the $200,000 in the 401(k). I mean, yes, that’s I mean, $200,000 isn’t chump change, but $1.7 million is kind of the bigger animal.

Al: Yeah, that’s right.

Joe: So, yeah, do you want to kind of take a look at both accounts as one because they’re still pre-tax, just roll them together and go from there. That’s all we got today, folks.


Stick around for virtual commuting, beer, blood brothers and recycled jokes in The Derails at the end of the episode.

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