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
June 29, 2021

Do Roth IRA conversions increase Medicare premiums? How can you convert to Roth and stay below the IRMAA threshold (that is, Medicare’s Income-Related Monthly Adjustment Amount)? Also, a Roth conversion strategy to account for RMDs, those 5-year rules for withdrawing from your Roth depending on whether you’re over or under age 59 and a half, and “how much should I have in a Roth to be in a low tax bracket in retirement?”

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Show Notes

  • (00:52) Do Roth Conversions Affect Medicare Premiums? (Frank, MN)
  • (06:09) Roth Conversion Strategy to Stay Below the Medicare IRMAA Threshold? (Brad, TN)
  • (12:30) How to Craft My Roth Conversion and RMD Strategy? (Paige, Waukesha, WI)
  • (18:40) Understanding the 5 Year Rules on Roth Withdrawals: Age Matters (Jim, Santa Cruz, CA)
  • (25:05) How Much Should I Have in Roth to Be in a Low Tax Bracket in Retirement? (Anna, TN)

Free resources:

LISTEN | YMYW PODCAST #226: Medicare Beginner’s Guide: What You Need to Know Now

LISTEN | YMYW PODCAST #255: Breaking Down the Confusing 5-Year Roth Clock Rules

LISTEN | PODCAST #265: Bear Market Investing Strategies and Revisiting the 5-Year Roth IRA Withdrawal Rules

5 Year Rules for Roth IRA Withdrawals

5 Costly Required Minimum Distribution RMD Mistakes to Avoid

The Ultimate Guide to Roth IRAs

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® podcast  332, does a Roth IRA conversion increase your Medicare premiums? How can you convert to Roth and stay below the IRMAA threshold (that is, Medicare’s Income-Related Monthly Adjustment Amount)? Also, the fellas spitball a Roth conversion strategy to account for required minimum distributions or RMDs, they cover those 5 year rules for withdrawing from your Roth depending on whether you’re over or under age 59 and a half, and Big Al answers the question, “how much should I have in a Roth to be in a low tax bracket in retirement” while Joe falls asleep. Now it’s your turn! Visit YourMoneyYourWealth.com and click Ask Joe and Big Al On Air to send in your money questions, comments and stories – Roth related or not. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Do Roth Conversions Affect Medicare Premiums? (Frank, MN)

Joe: Frank from Minnesota writes in. “If I move $100,000 from my 401(k) IRA account into a Roth IRA, which we report on our 2020 taxes and pay the old taxes because of this is income, how or if does this transfer then increase my income listed in the Social Security, which then could affect how much I pay for Medicare? Basically, I know that your income can affect what you pay for Medicare. I believe that if our income is over $170,000, then our monthly Medicare premium goes up. So if we moved $100,000  to the Roth and I have not seen the additional dollars show up in my Social Security benefits for 2020, which then would cause us to have higher Medicare premiums in two years. Can I assume that the move of money from my 401(k) IRA to a Roth IRA does not affect our Medicare costs in the coming years? Thanks.” Unfortunately, Frank, no. Alan, you want to take that?

Al: Agreed. The answer’s no. Unfortunately, when you do any kind of Roth conversion or show any kind of income that adjusts, that increases your adjusted gross income- and by the way, Frank, I guess for 2021, it’s $176,000. If you’re below $176,000, you pay the lowest of Medicare premiums. And who knows what it will be a couple of years from now because indexed for inflation, whatever. But at any rate, if you do a Roth conversion, you’re going to in two years and it pushes you over that, you are going to have higher Medicare premiums for one year, two years from now. So the way we kind of think of it is you look at those increased premiums, that’s like an extra tax and you add that on to the extra tax you’re paying. If it still makes sense, if it’s a low enough bracket, do it anyway. If not, then pay attention to the $176,000.

Joe: So what, in other words, is that if you have an increased premium of call it $100 dollars a month just to make the math simple. So that’s $1200 a year. So then you take the $1200 that would cause an increase in your Medicare premium two years from now. You add that to the tax liability of the Roth conversion and you divide that into the Roth conversion amount to see what your effective tax rate is.

Al: That’s right.

Joe: Because we tell you to convert to the top of the 12% or the 22% or whatever. But when you got these funny other things that go on, such as your Medicare premiums are going to go up or some of you, that all of a sudden more of your Social Security’s going to be taxed. You have to look at a little bit differently. You can’t just go to the top of the bracket and just assume that you’re going to pay X amount of tax. You’ve got to figure out what your true effective rate is. It’s a little bit more complicated. But I think Frank’s on the right path because you don’t want to blow this up and all of a sudden get pissed off at yourself or us for talking about Roth conversions. And then in two years, Frank’s like you never told me about this.

Al: What about that? So let’s say Frank converts and he’s in the 22% bracket and that’s a good bracket for him. We’re just making that assumption. And so if he pays an extra $1200 in Medicare premiums and he converted $100,000, well that’s $1200 into $100,000, that’s 1.2%. So you add that to the 22%. So now it’s like you’re in the 23.2% bracket. Does that make sense? Maybe, maybe not. Depends upon your situation. We’d have to understand what your tax bracket is going to be in the future. But you’re right, Joe, it’s not just Medicare or Social Security payments. In some cases, if you own rental property, you can deduct losses of up to $25,000 if your adjusted gross income is below $100,000. So sometimes your Roth conversions blow that up. Or in some cases you haven’t had to pay the net investment income tax on your passive income interest, dividends, capital gains. The Roth conversion makes that happen. Right? So you have to you have to look at these things all together. That’s why you can’t just say I mean, maybe it seems like we try to oversimplify- you really- to do this right- you have to do a tax projection to see, OK, what exactly is happening and does this still make sense?

Joe: Right. I had back surgery. But, you know what triggered this whole thing was my ankle.

Al: Yeah, your foot.

Joe: It was my ankle. Right. It’s like, what the hell? Oh, my God. You know, I’m feeling this weird pain in my ankle. So, people look at things in a vacuum. I would be like, oh, well, I must have sprained my ankle or something. But it was in my back. I wouldn’t have known that without an MRI. And then all of a sudden it went to my foot and I had drop foot and foot drop, whatever the hell it was.

Al: We have a friend that had that tremendous hip pain and she went and got it checked, MRI, all that stuff. And they said, yeah, you need a new knee. It’s like, no, it’s the hip.

Joe: It’s my hip.

Al: It turns out that was what she needed.

Roth Conversion Strategy to Stay Below the Medicare IRMAA Threshold? (Brad, TN)

Joe: “Dear Joe, Big Al and Lovely Andi. Hi guys. Brad from Tennessee here. Drive a 2012 green Ford F150 and my dog died.” What the hell? How do you start that-? This is just-

Andi: Is he a country music writer? Is he writing a sad song here, from Tennessee?

Joe: 8 cats and 2 horses.

Al: Oh, but those belong to his wife. That’s why- he doesn’t have his own pet. That’s the problem.

Joe: Jesus. Depressing. “I’ve been listening to you for a few months and thought you might be able to give me some insight, not advice, on what I need to do. I turn 70 next month and will start my Social Security; wife started hers at age 66, full retirement age; our combined Social Security will be about $60,000; no pension. I’ve been retired for about 3 years and have been using these low income years to convert IRA monies to a Roth and fill up that 12% tax bracket and plan to continue to until my RMDs start at age 72. Presently, I have combined IRA and 403(b) assets of $1,600,000 and we have Roths of about $600,000 and taxable brokerage accounts of another $1,000,000; no debt; 4 kids, all gone; no mortgage.” See? Thank you, Brad. It’s like no debt, besides my big mortgage. Well, then no, that means your debt. Brad here. No debt, no mortgage. All done. “Wife owns a couple of farms in South Carolina and North Carolina, really just raw land with no real cash flow. And also have a small inherited IRA from her dad and a few other assets. Our total spending the past 3 years since I retired is about $10,000 a month, not counting the kitchen remodel for the wife. Question is, should I be converting up to the top of the 22% bracket, staying below the IRMAA threshold? My tax-deferred accounts are the same size, if not larger than 3 years ago, even with the Roth conversions. My spreadsheet suggests that I would not hit the 24% tax bracket with RMDs until about age 90, baring any tax increases by Congress before then. Love you guys and your delightful banter.” Delightful.

Andi: Thanks, Brad.

Joe: Yeah. What do you think, top of 22%- so what the hell is IRMAA?

Al: That’s the Medicare thing.

Joe: Yes.

Al: I don’t know what it stands for, but you do.

Joe: Go for it.

Al: I have no idea.

Joe: What’s the threshold?

Al: $176,000.

Andi: It stands for Income Related Monthly Adjustment Amount.

Joe: So why would IRMAA mean anything to him? Because they adjust what is the Medicare premium based on his income.

Al: Well because- so this is based upon 2021 which looks back to 2019’s modified adjusted gross income. As a married couple, if your income is, modified adjusted gross income is below $176,000, your Medicare Part B premium is $148. But if it goes even $1 over that it becomes $208. So there’s a much bigger premium. So that’s, call it $60 more a month, times 12 months, whatever that is, $720. It’s not going to bankrupt you, but that is a consideration. But part of his question was, should he convert up to the top of the 22%? Of course. Or at least to the-


Al: – IRMAA limit. At least to that limit.

Joe: So the top of the 22% tax bracket’s $180,000?

Al: $173,000.

Joe:  OK, and the IRMAA limit is, what?

Al: $176,000. But that’s taxable income for the top of the 22% versus modified adjusted-

Joe: – gross income. So your taxable income- so you’re going to break through the IRMAA limit if you go to the top of the 22% tax bracket.

Al: You are. But if you just go to the $176,000, let’s just say and you subtract out a standard deduction of about $25,000, $26,000, call it $150,000 is your taxable income, you’re in the 22% bracket. That would be- to me that would be kind of a minimum of what you’d want to do. Because Brad, you only got a couple of years, you’re turning 70. So this is your chance to get this done before your required minimum distributions kick in. And if you’re at $1,600,000, 4% of that-

Joe: $64,000.

Al: Yeah, $64,000, add that to your Social Security. You’re already in the 22% bracket forever, which we already know in just two or three years becomes 25%. And who knows what it could become in the next 20 years when you’ve run your spreadsheets.

Joe: So the 22% is a no brainer. 24% may make sense because it could go back to-  the 22% could revert back to the 25%.

Al: It could.

Joe: So you still got a tax arbitrage there by paying tax at the 22% or 24% versus 25%.

Al: And you got more flexibility. So all you do if you go a little bit higher than $176,000 is add the cost of the extra Medicare premiums to the tax you’ll pay and figure out if it still makes sense.

Joe: Yeah, you just kind of want to look at the effective rate.

Al: Yep.

Joe: Great job of saving, Brad. Very good job.

Check out the podcast show notes to read the transcript of today’s episode and to learn more about Medicare, Roth conversions and required minimum distributions. The Medicare Beginner’s Guide: What You Need to Know Now podcast episode #226 with Danielle Roberts is a super-useful and interesting overview of Medicare. The Ultimate Guide to Roth IRAs will tell you everything you need to get started with tax-free growth on your investments for life, and I’ve also included an educational video on how you can avoid some of the common mistakes people make with required minimum distributions from their retirement accounts, which, as of now, begin at age 72. All these financial resources are free. Just click the link in the description of today’s episode in your podcast app to get access. And if you find any of this stuff useful or entertaining, do us a favor and share it!

How to Craft My Roth Conversion and RMD Strategy? (Paige, Waukesha, WI)

Joe: Paige from Waukesha, Wisconsin. OK, “Hi YMYW. I’m single and will retire at the end of 2021. I’ll be turning 60 in 2022, I drive 2016 Honda CRV. I don’t have any pets at this time, but I do foster animals for the Humane Society. Does that count?” Of course it does.

Al: It counts.

Joe: You got llamas? “My story, $23,000 annual income in 2022. My income will drop to $8000 starting 2023 going forward. My annual expenses are around $50,000. I plan to take Social Security to 70, I’m guessing $2000 a month. I am trying to assess and manage the impact of RMD in taxes. Roth conversions of course, is the only tax lever that I see. Starting in 2022, I plan to do Roth conversions to the top of the 12% bracket from either my 401(k) or IRA account. Does it really matter which I tap into first? I’m planning to use my brokerage account, $200,000, to pay the taxes for the Roth conversion to pay for my living expenses for the near term. I want to continue to do Roth conversions until I burn through my brokerage account. 1) What is the time frame for calculating the amount of Roth conversion that I can execute for 2022 in the years going forward? I have $1,000,000 between 401(k) and IRA accounts plus about $50,000 in the Roth. Is there an amount floor in my total tax-deferred accounts where it stops making sense to continue to do my conversions? 2) Do I have any other options to consider if I want to continue Roth conversions after I drained my brokerage account? 3) Am I looking at my situation in the wrong way and making things too complicated based on my net worth and available money and brokerage account? Thanks for any insight you can provide. Since I came across your podcast, I became a great fan of your show.” Thank you, Paige.

Al: That’s nice.

Joe: Waukesha.

Al: Waukesha.

Joe: So I get what she’s doing here. She spends $50,000 a year. She wants to mitigate the impact of RMD at RMD age. She’s 60. She’s going to turn 72 in 12 years. She’s got $1,000,000 in her account today, 12 years, fairly conservative, call it $2,000,000 at age 72?

Al: It could be, but I think she’s going to be using it to live.

Joe: Not that much, though. Well, hold on, because she turns-

Andi: 60 in 2022-

Al: Her income-

Joe: So she’s got $8000 of income 2023 going forward. She spends $50,000. So she needs $40,000.

Al: Yes, she needs $40,000, which is already about a 4% distribution.

Joe: 4% burn rate. So she’ll probably then, call it $1,200,000? Or maybe $1,000,000?

Al: Yeah, yeah, 4%, well, let’s say it earned 6%, so it’ll be whatever, $1,300,000,  $1,500,000.

Joe: Something like that. And so should she do conversions in the first place? She wants to do the conversion of the top of the 12%.

Al: You know, here’s my feeling. I like conversions in the 12% bracket for almost everybody-

Joe: – almost everyone.

Al: Yep. So if you need- you got $8000 already and you need $50,000. So you’re going to have to, in round numbers, you’re going to take $40,000 out anyway. Just to cover your living expenses. And then, so that’s the $50,000. I’m assuming you’re single because you didn’t mention a spouse, but at any rate-

Joe: Single.

Al: Single?

Joe: “I am single-” first thing she said.

Al: Oh, there you go. Oh you’re right. OK, so the top of the 12% bracket’s $80,000, you get roughly a-

Joe: – $40,000.

Al: Sorry. You’re right. Sorry. I totally screwed that one up. Yeah. It’s $40,000. Your standard deduction is roughly $12,000, let’s call it. So if your income is $50,000 minus $12,000, you’re at $38,000. So you’re almost at the top of the 12% anyway. So it would only be a couple of thousand dollars if I did my math right?

Joe: No. OK, she’s got $200,000 in a brokerage account. She’s got $1,000,000 in a retirement account. She’s going to pull the $48,000 from the brokerage account. So she’s going to be in a 0% tax bracket. She’s going to convert $40,000.

Al: Oh, got it, yeah, you’re right. I forgot about the brokerage. So you could live off of that.

Joe: – the brokerage, but she’ll live off the brokerage for 4 years. She’ll be able to convert $200,000 over the 4 years. Roughly give or take. And then she’s out of the brokerage account and then from there she withdraw from the overall account, plus the $8000 pension. I would wait until age 70 and then kind of see where everything kind of falls in place there. And then look at conversions if it makes sense.

Al: Yeah. If there’s enough income. I actually think you’re absolutely right, Joe. Good thinking about this another way. So she’ll get probably a couple hundred thousand out, she’ll probably even with Social Security, always be in a pretty low bracket. So I think that’s enough. I don’t think you have to go more than-

Joe: I would not convert more than the 12% tax bracket.

Al: Yeah. And if you’re living off your brokerage account, you could probably max out the Roth conversion for 4 years. That’s about $50,000ish per year, $200,000. That’s probably good enough.

Joe: Yeah. And then that $200,000 compounds tax-free for life and that would reduce the RMD long-term. And then if she’s charitably inclined, she’s given a couple of bucks to the Humane Society, to the kids, to the animals, to the llamas out there. She can do a CRD. She can give a couple of bucks, instead of taking the RMD, she can go directly from there, give it to a charity, avoid the taxes there. So there’s a lot of options, I think, of what Paige can do.

Al: That’s right. And year 5, when you’re done with your Roth conversions, you just pull the money out of your IRA to-

Joe: – live off of.

Al: – living expenses and you’re still in the same bracket. So there you go.

Understanding the 5 Year Rules on Roth Withdrawals: Age Matters (Jim, Santa Cruz, CA)

Joe: “Hello Andi, Big Al and Joe. Jim from Santa Cruz calling. It seems impossible that anyone could send you a question about Roth IRAs that you haven’t heard before, but maybe, just maybe, these two will qualify. Both are connected to the 5 year rules.”

Al: Oh, that’s your favorite, 5 year rule.

Joe: Got a  5 year clock? Love the 5 year clock. So, Jim, let’s see what you got. “Question number one, I recently opened a Roth IRA at a brokerage. The current balance is zero. If I do a backdoor Roth contribution, is there a minimum amount to start the clock on the 5 year period? Can I convert $5 into the Roth during 2021, pay $1.20 in tax, assuming I’m in the 24% tax bracket and the 5 year period has started?” OK, yes. That is true.

Al: That’s a very easy answer. The 5 year clock is not dependent upon how much is in your Roth. You could do a $1 if you want. Pay $.24 tax.

Joe: OK, so he opened up a Roth to do a conversion. So he has an IRA that he’s going to put $5 in.

Al: Just to start the 5 year clock.

Joe: And he’s going to convert it. And then now he’s going to pay $1.20 tax and have the $5 dollars in the Roth.

Al: That’s right.

Joe: So. Yeah, the 5 year clock started that day.

Al: I have no problem with that whatsoever.

Joe: “Number two, I expect to retire at the end of 2025 at age 65.” So what year is it now? It is 2021, so he is over 59 and a half.

Al:  Yep, call it 61,

Joe: OK. “Beginning in 2026 I plan to convert $30,000 to $50,000 each year from a qualified IRA into my Roth. If I withdraw converted funds in less than 5 years, I understand that taxes are due on the investment earnings. If more than one year elapsed between conversion and withdrawal, are these earnings considered long-term capital gains which, if my income in retirement is in the first or second bracket, have a current tax rate of zero? Your show’s great. Thanks, as always, for doing what you do, Jim from Santa Cruz.” OK, Jim, let’s look at a couple things here.

Al: See if you can dissect that.

Joe: I’m going to try. So let me explain the 5 year clock.

Al: Oh boy.

Andi: We have a white paper on it. We could just send it to people.

Al: Can I go take a restroom break?

Joe: There’s two 5 year clocks. And so I’m going to just maybe talk, and Jim- Jim just wants to understand the 5 year clock in regards to conversions. If Jim is under 59 and a half, each conversion that he does, if he does a regular conversion, a backdoor Roth conversion, a giant garage, Megatron, whatever stupid name you guys want to put on this thing, it’s a 5 year clock for each conversion that he does, if he’s under 59 and a half, until he turns 59 and a half.

Al: I agree with you.

Joe: Jim’s going to open up a Roth IRA. He’s going to do a conversion in it and he’s going to continue to convert. But he’s already over 59 and a half. So the first conversion that he does with $5, that started his 5 year clock when he was age 60. And then he’s going to retire at age 63 and he’s going to do a $30,000 conversion each year thereafter for the next 3 or 4 years. Each of those $30,000 or $50,000 conversions, the 5 year clock is already satisfied by the $5 that he put in the Roth IRA several years previous.

Al: Yes, I agree with that.

Joe: Can you follow that?

Al: Yeah.

Joe: Or was it confusing?

Al: It’s confusing. But here’s why that’s true. So when you’re under 59 and a half, if you want to get money out of your IRA, if you take it out, you have to pay a 10% early withdrawal penalty. If you convert it to a Roth and take it out the next day, well you somehow got around that 10% penalty. So the IRS got wise to that and said, OK, if you’re under 59 and a half, every single time you convert, you’ve got to wait 5 years to get at your principal. So that’s why they did that. The day you turned 59 and a half, that rule goes away. So you don’t have-

Joe: Because you already satisfied the 59 and a half rule.

Al: That there is no 10% penalty because there’s no early withdrawal. And so it’s very confusing to people even that are over 59 and a half because they think the 5 year clock still applies to them. We’ve had people argue with us. You guys don’t know what you’re talking about.

Joe: We have a lot of people argue with us.

Al: But that’s why. And so once you’re 59 and a half, then the 5 year clock on each conversion goes away. There is no such thing.

Joe: Yes. And there is never going to be a capital gains tax, anything that comes out of a retirement account, you’ll always be ordinary income.

Al: Correct.

Joe: If it comes from a Roth IRA, it will be tax-free. So there’s no capital gains any time you have a retirement account, unless it’s net unrealized depreciation. And that’s a totally ‘nother ballgame.

Al: Oh boy. Save that for another day.

We do have that white paper and we will send it to you. It’s a whole guide dedicated to those 5 year clocks, with an in-depth breakdown on how and when you can pull money out of your Roth IRA, based on whether you’re under or over age 59 and a half. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the 5 Year Rules for Roth Withdrawals and to ask Joe & Big Al your money questions either via email or voice message – and those voice messages will get top priority.  For more in depth personalized help, click the big green Get an Assessment button at the top of the page to schedule a free financial assessment. Stress test your retirement portfolio, find out where you might be able to save more on taxes, and get a plan tailored to your specific risk tolerance, goals and circumstances. It’s all at YourMoneyYourWealth.com

How Much Should I Have in Roth to Be in a Low Tax Bracket in Retirement? (Anna, TN)

Joe: Got Anna from Tennessee, writes in. “Hi Al, Andi, and Joe. Love your show and the detailed information you give, unlike most of the other podcasts, which are too basic. If I have to listen to one more financial expert to tell me to give up drinking lattes to save money for my retirement, I’m going to scream.”

Al: Referring to David Bach and the Latte Factor.

Joe: So that’s the only advice we give on this show, Anna.

Al: You know, lattes are way too expensive.

Joe: Yes. We got the booze factor.

Andi: I was going to say, nobody here is going to tell you to give up drinking beer.

Al: Yeah, we’re not going to say that.

Joe: No. “So my question, how do I figure out how much to have in my Roth IRA upon retirement in order to keep myself in a lower tax bracket? I’m currently in the 22% tax bracket and want to be in the 12% tax bracket in my retirement, or 15% if taxes go up 2026, I want to spend $50,000 dollars a year post-tax current dollars in retirement. I anticipate $60,000 a year after expenses from a rental property and will be taking the rest out of retirement accounts until age 70, when Social Security will add another $38,000 a year towards the $50,000.” Oh, it’s $5000 a year. I’m sorry. I thought it $5000 a month in rental. So it’s $5000 a year.

Al: $5000 a year rental.

Joe: Got it. OK, so I was like, well if she’s got $60,000 a year, she’s already done.

Al: – she’s done.

Joe: So she needs $45,000 from the $5000 to get to the $50,000-

Al: Got it.

Joe: We’re on the same page here. So now she’s pulling $45,000 out. Then Social Security is going to give her another $40,000, I’m rounding-

Al: So that pretty much takes care of it. Close to it.

Joe: Or if I round the other way and she needs another $5000 towards the $50,000.

Al: Yeah. Yeah sure.

Joe: “I’m currently 50. Plan to start withdrawals at 60.” So a little 10-year time frame for Anna. “And assuming a life expectancy of 95. I have no husband or kids so I have no concerns about leaving any kind of legacy. And I have the money now to pay the taxes on a partial conversion every year until retirement. So how do I figure the math out to find out how much I need to have in the Roth IRA to stay in the lowest tax bracket? Or am I wrong about limiting the amount I have in my Roth heading into retirement and should just be converting and contributing to it as crazy and as much as I can? I’m an English teacher, not so good with math or figuring out taxes, your help is greatly appreciated. Thanks.” So she’s understanding that if I get tax diversification, if I have money in a Roth, in a brokerage account, in a retirement account, I have options when I pull money out to provide myself with a retirement income that I can control my taxes long-term.

Al: Right. And so in a case like that, then if you have certain years where you want to spend more, you want to do something special, you can pull that money out of the Roth and still stay in the 12% bracket. So the thinking is exactly right.

Joe: So now she wants to get into the nitty gritty of this. So I guess to reiterate that strategy, what we’ve talked about, I think people get on this Roth conversion train and they forget what the hell they’re doing it for. We haven’t really talked about this in a while, it’s always this mega door, backdoor, super door back, whatever.

Al: Like what’s the – next?

Andi: Megatron.

Joe: A Megatron. The Roth gater. It’s like, what the hell-  why are we doing all this stuff to begin with? And it’s to give you control of your taxes in retirement. Is that you have options on where to pull from. You will pull from your retirement account to keep you in the 12% tax bracket or 15% or 22% or 25%, whatever the brackets are. And then if you want more cash or capital, you have other options to pull from. You have a brokerage account that’s capital gains. And if you manage that appropriately by doing tax loss harvesting, you could potentially pull money from that tax-free. If you got money into a Roth, that’s tax-free. So you have balance in your overall strategy and diversification from a tax perspective. So I think Anna gets this because she’s been listening to a lot of really bad podcasts out there.

Al: Apparently.

Joe: But – she’s catching on.

Al: We made the grade somehow.

Joe: Yes. So she’s thinking, OK, well, what the floor? What’s the math? How do I figure this out? How do I keep myself in the 12% tax bracket? And unfortunately Anna, there’s nowhere near enough information. I have no idea how much money you have in a retirement account. I know what you’ll have on Social Security. I know what you’ll have as a living expense. But what’s your retirement account? Did she give a balance?

Al: No. So it makes a little a little hard.

Joe: Right. So we don’t know, let’s say as you age, and if you don’t necessarily need that money, if the RMD is going to pop you into let’s say a higher bracket. Or you might be in the 12% tax bracket throughout.

Al: So let’s maybe answer it this way. So if you’ve got, Anna, if you got $500,000 in an IRA, just as an example. And how old is she? 50?

Joe: Yep.

Al: So and she’s going to start needing at 60? She’s working?

Joe: Yep. English teacher.

Al: OK, perfect. So at age 60, let’s just say that $500,000 has grown to $1,000,000.

Joe: Mm hmm.

Al: Right? And then she presumably would start drawing out at that point. I mean, we don’t have enough information to know, but let’s just say she does. But let’s just say the $1,000,000 stays kind of level because she’s using that money to live off, because that would be about a 5% draw rate roughly. So it may not grow that much. So if you have $1,000,000 at age 72, then we just figure roughly a 4% is your RMD in year one. It’s not exactly, but gives you a pretty close idea. So that’s $40,000. So now it’s like, OK, now I know something. So if my RMD is going to be $40,000, I can add my Social Security or my pension on top of that. And maybe, maybe now it’s $80,000. Right. OK, so that’s and then you get a at least= a standard deduction for single person’s about $12,000, we’ll just say it’s $10,000 to make easier math. So 80 minus 10 is 70. Now I’m $30,000 over the 12% bracket. So now I can start working backwards over time to figure out how much to convert. But we have to have a lot more information.

Joe: That was just clear as –

Andi: – mud.

Al: It was.

Joe:  I was- I totally fell asleep there for a second too. I saw you were like grinding at it too. And then you’re going to be $30,000 under this and you’re going to be doing this and it’s going to be great. If you could figure all this out-

Al: If you rewind the tape, you’re going to go, gosh, that was brilliant. You have to listen to it two or three times to get the brilliance. And you have to have coffee, no cocktails.

Joe: Got it. Got it. So I like-  she’s on the right track. I want to give her aplot-

Al: Yes.

Joe/Al: – applause-

Joe: Or I want to applaud her for actually thinking in the right way. It’s like, OK, I get it. I need to start doing some things. I need to start maneuvering my money around to keep me in a low tax bracket. I think what you do now is, yeah, you keep throwing money at the Roth IRA like crazy, until you give us more information, then we can probably maybe pencil it out a little bit better. But if you’re in the 12% or 22% tax bracket as a single taxpayer, you want to spend $50,000 a year, you’re going to have roughly $40,000 and – what’d she say? $38,000 in Social Security. So $40,000 there. You’re almost at the 15% tax bracket or 12% tax bracket as a single taxpayer. Even though of course Social Security is taxed a little bit different, provisional income, and blah blah blah blah blah. But you have another, you have these retirement accounts that are going to be forced out or that are going to be pulled out to provide your lifestyle. So I would convert to the top of the 12% or the 22% tax bracket and keep throwing money at the Roth. I think that will give you a really good start. You’re 50, you got 10 years to build it out. Alright, that’s it, we’re done. Thanks for your questions folks, keep ’em coming in please. This show is not a show without your questions. We’ll be back next week. The show is called Your Money, Your Wealth®.


How to read an email – again, Joe’s strut, Waukesha, CRVs and New Balance shoes in the Derails, so stick around to the end of the episode.

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