Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:10 – Early Retirement Overconfidence? Aggressive Roth Conversions? (Walter & Skyler, Iowa)
• 13:25 – Roth Conversion Bracket Call: 22% or 24%? (CA Dreamin’, Central Coast)
• 22:27 – Tax Bracket vs. Effective Rate: The Roth Math Most People Get Wrong (Mike & Carol, FL)
• 32:16 – Should the NEC Go to the Roth? The 401(k) Decision (Westley & Buttercup, TX)
• 42:28 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Welcome to Your Money, Your Wealth® podcast number 586, a Roth conversion master class disguised as four spitballs from Joe and Big Al. “Walter and Skyler” in Iowa ask if they’re on track to retire early, or if they’re just cooking up overconfidence? And how aggressively should they convert their retirement savings to tax-free Roth money before the pension and Social Security kick in? California Dreamin’ has it down to one decision: convert to the top of the 22 percent bracket, or push into the 24? “Mike and Carol” in Florida ask, when you’re weighing a conversion, should you be looking at your tax bracket, or your actual effective tax rate? Finally, is it worth the cost for “Westley and Buttercup” to use the brand new option to turn a big employer contribution into Roth money? If this show has ever helped you – or if you ever thought what the heck are these guys talking about – do us and your fellow podcast fans a favor and leave your honest ratings and reviews in Apple Podcasts or any other platform that accepts them, like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, PocketCasts, Podcast Addict, and Podchaser. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Early Retirement Overconfidence? Aggressive Roth Conversions? (Walter & Skyler, Iowa)

Joe: So how come it starts with ages 49?

Andi: ‘Cause that’s how Walter wrote his email.

Joe: Okay. All right. We- It’s not like, “Hi, Joe. Big Al.” Yeah. “Good to see ya.” No.

Al: we try to just read it like it is, huh?

Joe: All right. Age, ages 49, me, Walter, and 52, wife, Skyler, from Iowa.

Al: Okay, now we’re there.

Andi: Those are the names from Breaking Bad, by the way.

Al: Okay.

Joe: We got savings of $575,000, Walter. 118,000 traditional 401(k), $115,000 rollover IRA, Skyler, $20,000 Roth 401(k), $25,000 taxable brokerage growing via RSUs plus bonus.

I’m not following any of this. but- I’ll, I’ll- … we’ll see if we can figure it out …

Al: I’ll summarize for you at the end.

Joe: Got it. Skyler’s IPERS pension, $4,400 a month at 62. Income, 360,000. Contribution, Walter maxes 401(k) plus catch-up, 6% match, extra $14,000 per year after tax.

Andi: Goes to the Roth 401(k).

Joe: Then he converts to the Roth 401(k). RSUs vest 25 to 35 a year, $25,000 bonus, taxable.

Andi: Goes to the taxable, yep.

Joe: Okay. okay. Social Security, 62, Walter, $3,900 a month. Skyler’s at $3,400 a month. Walter retires at 59 and a half. Skyler retires at 62.

All right. “Skyler’s sick leave subs- subsidizes health insurance until Walter hits Medicare. Lifestyle spend is $160,000. We invest aggressively. Walter drives a Hummer EV and drinks bourbon. Skyler drives a Lexus RX and drinks sauvignon blanc.” Spitball question, Walter and Skyler edition.

Andi: He’s writing this like it’s a TV show outline or something.

Al: I think so.

Joe: Is that what he’s doing?

Andi: I think so.

Al: It’s a, it’s, a, summary. It’s not really a, narrative.

Joe: Got it. Okay.

Andi: It’s a plot synopsis.

Joe: “Are Walter and Skyler actually on track to retire on this timeline, or are we just cooking up some overconfidence? How should Walter attack Roth conversions during the low income window before pension and Social Security hit? Should we keep building taxable for early retirement flexibility, or keep going on a full Heisenberg on the Roth strategy?” All right.

Al: Okay.

Joe: Help break this down, Al.

Al: Yeah, let me, let me try to put this together.

Joe: All right.

Al: So, they have about 800,000 currently. if you add up all the sources that I could find on savings, I get 103,000, and that, that comes from, maxing a 401(k). Also the employer match is, also extra going in, you know, the Mega-

Joe: Yeah, the Mega Backdoor …

Al: Backdoor Roth. Now, plus bonus, and RSUs, 50, 50 to 60,000. I just said 50 minus tax. I added 35, so 103. Okay. So that’s what I get- All right … for savings. He says he invests aggressively, so I said 7%.

That’s as aggressive as I wanna call it, just to be on the conservative side.

Joe: Okay.

Al: 10 years, ends up with 3 million, okay? So that’s where we’re at. spending at about 160, 3% inflation rate, 10 years, 215,000. So here’s the math. So y- if you wanna spend 215,000 in future dollars-

Joe: How old is he gonna be?

Al: He’ll be 59- And

Joe: she’ll be 62 …

Al: and a half.

Joe: Yep.

Al: Yep. So I’ve got, I’ve got- S- … her, the spend of 215, her pension about 53 grand, her Social Security 41 grand, shortfall 121. that’s a 4% distribution rate, and that’s without his Social Security. Yep. So I think it works. I think it works

Joe: Yeah. I think it’s pretty close.

Al: Yep.

Joe: 3 million. They need about anywhere from two and a half to three and a half.

Al: Yeah.

Joe: That’s the spitball.

Al: Yeah, right off the bat. so yeah, I, think-

Joe: If you’re saving $100,000 over the next 10 years, I think they’re gonna be in really good shape. Yeah. I don’t think they have been saving that much- No, they haven’t

over the last 10 years. So it looks

Al: like- Oh, I would agree with that. Yeah, so maybe they kinda-

Joe: Probably ramped up their savings over the last three and a half years …

Al: they, kinda, she hit 50, and they, thought, wait a minute. we need to save a little bit more.” This is my guess. so in terms of, Can they retire?

I think so. I think based upon the assumptions that I just gave. how should Walter attack Roth conversions during the low income window before pension and Social Security hit?

Joe: When is, so Social Security, they’re gonna take at 62.

Al: I don’t know. I, that, I just did it in my example. I, don’t know whether that’s the right answer or not.

Joe: Social Security at 62, that’s the numbers he gave us.

Al: yeah. I, my guess is that m- maybe she takes it early and he lets it go longer. Yeah, ’cause it’s a higher benefit, and that’s probably what I might do.

Joe: Okay.

Al: I think, they’re gonna be in the 22% bracket.

Joe: She’s got a decent size pension.

Al: She does, yeah. Yeah, 53,000 I think is what I calculated. so I think they would probably convert in the 22% bracket, maybe 24. It’s hard, it, you know, 10 years from now, it’s hard to, say. But yeah, definitely the, reason why you wanna think about conversions when you retire before Social Security and required minimum d- distributions is your taxable income’s gonna be lower, right?

When you add Social Security and when you hit 73 or 75, depending upon the year y- you were born, and you are required to take money out of your 401(k) IRA, it pushes your income in a much higher bracket. So while you’re in lower brackets, you retire before Social Security and RMDs, then you’re in a lower bracket, you can do Roth conversions.

So that, that does make sense. I think what I might think about based upon their income, I might change their 401(k) contributions to all Roth right now because they don’t have any Roth. Yeah. I mi- I might, think about that.

Joe: Don’t they have 20,000?

Al: The in- yeah, the income, their income-

Joe: they got an extra 14,000.

He should just continue to do the mega backdoor Roth too.

Al: Yeah, could do that as well.

Joe: So what are the, you saving in the… everything is going into tax-deferred at this point, right?

Al: y-

Joe: I don’t know where you get the, $100,000 savings. Is that the, including the match?

Al: Yeah, so that’s max his 401(k) , so that’s 33, w- ’cause he’ll be 50.

Okay? and f- and catch up, so that’s 33. 6% match.

Joe: I just, I computed- 33,

Al: 33. Yeah. Okay. I count- I counted that as 21,000. I don’t think she has a 401(k). then 14,000, mega backdoor plus 35,000 net of tax bonus to get the 103.

Joe: But he, where is he? He’s not saving the bonus.

I think that’s just his income, but-

Al: Maybe.

Joe: where is it? I, unless he’s paying down debt. Well- It’s a taxable account. It’s not the tax-free account

Al: that’s a good point. I assumed he’s saving.

Joe: Oh.

Al: Where did I- But- Where did I get that impression?

Joe: the 25-year bonus goes, like, with an arrow, taxable.

Al: Yeah.

Joe: So does that mean it’s going into a taxable account, or that is a, Well-

taxable event?

Al: I think that’s how I read it, but

y- you could read it either

way

Andi: I think it says, I think so it says that the extra 14K a year after tax is going to the Roth 401(k) , and the RSUs that vest and the bonus go to the taxable account.

Al: Yeah, you know why-

Andi: That’s what I think the arrows mean.

Yes. And you know why I thought that?

‘Cause this is under the contributions heading.

Joe: Oh. Yep. Yeah.

Al: See, if you look at it that way.

Joe: But, okay, so he just started to save the RSUs-

Al: Yeah, ’cause- …

Joe: and the bonus, ’cause he’s got- ‘

Al: Cause there’s 25, yeah …

Joe: $25,000 total in there

Al: Maybe did it last year- Yeah … and that was it. Yeah.

Or maybe this is new for him.

I

Joe: don’t know.

Al: Yeah.

Joe: Yeah. $25,000 taxable brokerage growing via RSUs and bonus.

Andi: RSUs plus bonus, so he just started.

Joe: So. Yeah.

Al: So I think, if these assumptions hold for the next

Joe: 10 years- I would not go in the taxable account. I would go more into the after-tax and convert

Al: Would you? Yeah.

Joe: I would.

I’d much rather have money into the Roth than in my taxable account. Yeah. You could still get access to the Roth,

Al: I know, but you could put it directly into the Roth 401(k) too.

Joe: Yeah, but if I want the tax deduction for the contribution part-

and then I’m gonna max out the after-tax contributions-

Al: Oh, I see what you’re saying.

You’re, saying take, some of this RSU bonus and, and-

Joe: Put it in the, after-tax-

Al: And final- …

Joe: component of the 401(k)

Al: It, it has, to go through salary, but you just do the math so it- yeah … it works out that way. Yeah. Okay, I’m with you. I like that.

Joe: Yeah.

Al: I like that.

Joe: Yeah, because he’s taking it after tax from the RSUs or the bonus and he’s putting it in the taxable account.

Just instead of doing that, you, probably need to spend it.

Al: Yeah,

Joe: Because your contribution limits are gonna be higher on a, you know- monthly basis.

Al: Yeah, no, that makes sense.

Joe: Yep, all Yeah, he’s on track.

Al: Yeah, so let me… I think this can get confusing for our, viewers or listeners.

Let me, explain. So you can’t just take a bonus and put it in your 401(k) –

or your mega backdoor Roth.

Joe: yeah- But- … unless you change your contributions, who knows what the plan allows. But- Yeah, in most cases you can’t.

Al: But what you can do, is, with each paycheck you can have a lot more going in.

So now your paycheck is too small to pay your bills, so the way that you cover that is when you get your RSUs or your bonus, you put that into savings, and now when you have your lower salary you just draw a little bit from savings, and that’s kind of a sneaky way to get that money into the backdoor Roth.

Joe: Yeah. You just have to kinda manipulate how the money’s gonna- distributed to you, because they still need to spend whatever, $160,000 a year on their lifestyle.

Al: Yeah.

Joe: How do you get the $160,000 out of the paycheck, but then everything else from the paycheck from your- Yeah … bonus and the RSUs go in the right plan from a tax perspective?

Al: Yeah. I remember trying to explain that to someone 15 years ago.

Joe: 17 times?

Al: Yeah. And, and they had a bunch of money in savings, and they said, I can’t afford my bills if my salary’s that low.” And I said, I think they finally got it, but it took a while.

Joe: Okay, you have all of this money here.

Al: It’s, we’re just-

Joe: Do some of that …

Al: We’re just kind of moving it around to make this all work.

Joe: Let’s keep on trucking here.

Al: Okay.

Andi: A Roth conversion done right can save you a fortune in taxes, but if it’s done at the wrong time, it could cost you just as much. This week’s brand new YMYW TV episode is all about that second half. It’s called 10 Common Roth IRA Mistakes That Can Cost You 50,000 Dollars or More, and the fellas walk you through the red flags could blow up your Roth conversion strategy. Stuff like doing it now if you’re going to be in a lower tax bracket later, jumping an IRMAA threshold, triggering tax on your Social Security, or losing a tax credit you didn’t even know you had. And for those of you who like to see it all in print, the companion Ultimate Guide to Roth IRAs is this week’s Special Offer. This guide goes into more detail on the difference between a Roth IRA and a traditional IRA, a Roth IRA and a Roth 401(k), when to convert, when to wait, and how to keep more of your money tax-free for life. If, like much of the YMYW audience, Roth conversions are anywhere on your radar, now’s the time. Find the links in the episode description to watch YMYW TV and to grab the guide for free. Choose “podcast” in the “how did you hear about us” drop down when you request that Ultimate Roth Guide.

Roth Conversion Bracket Call: 22% or 24%? (CA Dreamin’, Central Coast)

Joe: We got California Dreamin’- Yeah … Central Coast. Hello, articulate Joe.

Al: Ooh.

Joe: That is a lie. I noticed that. That’s the sh- the-

Al: Yeah, you’re-

Joe: They’re being, very, sarcastic here to start off this email.

Andi: I think they’re- … buttering you up to get a better spitball.

Joe: Yeah. “Big Al and Andi. I’ve enjoyed the podcast since 2018.” Wow. “And I have to say that Joe’s reading ability has made dramatic gains.” Thank you.

Al: that- that’s why you’re articulate now.

Joe: Killed it.

Al: Yep. And you said articulate correctly.

Joe: I know.

Al: That’s pretty good.

Joe: That is pretty good.

Al: Maybe in 2018 you wouldn’t have.

Joe: Guaranteed not. “It takes a big man to face his fears and, persevere. You go, Joe.” Thank you.

Andi: Well done on persevere.

Joe: Yeah, look at these big words. I know, right?

Al: Spit

them

all.

Joe: Live on, on camera.

Al: You’ve been reading a lot of books-

Joe: I have

Al: since you kids.

Joe: George and the Giant Peach.

Al: Okay. You haven’t-

Joe: Yep, Willy Wonka.

Al: You haven’t got into Harry Potter yet?

Joe: Nope, I

get-

Al: that, that’s a challenge. the, not yet.

Joe: Yeah- with all the scrin- like, all the weird names.

All

Al: the, like all the made up names. Yeah.

Yep.

Joe: Yeah. all right, let’s go.

“I’ll make this question easy and get to the point. I’m retiring this year and would like a little spitball. Drum roll, please. Roth conversion strategy.” Boom, let’s go. “My question is whether to convert to the top 22 or 24% tax bracket. The wife and I have $2.3 million in a qualified 401(k) plan. I’m

62, she’s 61. We have plenty of money, approximately $1.2 million in a brokerage account to handle the taxes. To maximize the conversion amount, we would both delay our Social Security to age 70. Our income from 62 to 70 would entail a $55,000 government pension with an annual COLA, with an annual COLA.

We’ll also have about $40,000 a year in taxable dividends and rental income. At age 70, our Social Security would be, 55 and 20,000, so another 70, 80,000 to- Yep … our annual income stream. So our Roth conversion amount would decrease. An additional benefit of staying in the 22% tax bracket is that we would avoid the IRMAA surcharges as well.

We do live in a high-tax California state, so, that, that’s for further background.”

Al: Okay, good to know.

Joe: Now the important stuff. I drive a 2024 Subaru Outback-

to haul my fly fishing and mountain bike gear.

Al: Oh my.

Joe: Oh my God.

Al: that’s why the, you got a Subaru.

Joe: Yeah. You gotta just look just like the commercial.

Al: You do. You gotta, you gotta-

Joe: It’s like I love fly fishing and I love mountain biking. Yeah. Of course I gotta get a- a Subaru That’s a good- Outback … you gotta,

Al: and you gotta wear a flannel shirt.

Joe: Of course. the wife loves her little 2019 Mercedes CLA. She’s a teetotaler- Except for special occasions. and ap- I know what that, that’s an Aperol Spritz.

Al: You’re right.

Joe: don’t care for those.

Al: I don’t either. You know what? I, I guess they’ve been around a little while. I’ve never heard of it until two years ago when I went to Australia.

Joe: Oh, really?

Al: and that’s what everyone was drinking.

Joe: That’s what everyone, drinks at, at our board meetings.

Al: Ah. Yeah.

Joe: Pretty popular in New York City.

Al: Apparently, yeah. Yeah. And Australia. In Sydney.

Joe: In Sydney, okay. “Currently, I’ve been enjoying a nice old fashion in the winter and a gin and tonic in the summer. Amber Ales are the preference on fly fishing or mountain bike trips.”

Al: Okay. ”

Joe: Keep up the good work, team.

Don’t ever lose the good-natured banter to spice up the topics. You manage to keep me listening after all these years, unlike other financial podcasts. California dreaming on the Central Coast.”

Al: Okay. Central Coast, love it.

Joe: 2018, that’s a long time to be a listener.

Al: Sure is.

Joe: Yeah. all So he wants a Roth conversion strategy.

He wants to retire. He’s got plenty of non-qual. He’s done a, hell of a job saving some money. He’s gonna have a decent pension. 22 or 24.

Al: Yeah, we’re missing one key fact.

Joe: What’s he spending?

Al: Yeah, what’s he spending? We don’t know.

Joe: Yep. ‘Cause if he spends 400,000 a year, he’s not gonna have an RMD problem.

Al: Correct.

Joe: That’s correct. Because all that money is gonna be depleted.

Al: So, Joe, since we didn’t have spending, I looked at this a different way. I said, okay, what’s the income tax bracket? ’cause they’re retiring this year, right? So dividend and rental income, 40,000. Pension, 55,000. And subtract out standard deduction of 32, I get taxable income of 63.

That’s about the- So that’s our starting point.

Andi: Yeah.

Al: So then you could add, you could do about 140, call it 150,000 to get to the top of the 22% bracket. Now, some of that will probably be for living expenses, or whatever, but so somewhere around 150,000 is what you could pull from tax-deferred, maybe the majority, going to the Roth, maybe all going to a Roth and living off the non-qual to stay in the 22.

Maybe that’s the right answer, but I, since we don’t know spending, I don’t, it’s hard to say.

Joe: Yeah. I would want, What is he? Is- I don’t know how much is rental and how much is, dividends either

Al: Dividends. And, I don’t know either ’cause, yeah, we don’t like to… I, so th- that’s why I just went with taxable income to figure out the amount of conversion

Joe: Because in this case, maybe some of that rental income is sheltered, right?

Al: Sure. That’s true.

Joe: But, that’s all

Al: with the cost seg study.

Joe: Yeah. Yeah, he needs to do a cost seg.

Al: That he can’t take.

Joe: I think if he’s gonna retire next year, the 22 is a plenty. That gets him 100- hundred some odd thousand dollars-

Al: Yeah …

Joe: out of the account over the next 10 years, it’s a million, million two.

Al: Yeah, that, that’s what…

Joe: Yeah, so- And then at 4% on another, let’s say a million, plus growth, maybe- he’s got a million five.

I don’t know. It’s- Yeah … he’s gonna be in that 22% tax bracket.

Al: That, that’s what I think.

Joe: If he doesn’t convert, he’ll be in the 24.

Al: I would agree with that. So, so, so my conclusion before even what you said was convert to the top of the 22, and c- but go…

Convert in the 24% bracket during down years. Yeah. Be opportunistic.

Joe: Yep.

Al: And, by the way, the reason you do that is if the market’s down, you can convert to a higher tax bracket because the, market will recover while it’s in a Roth, and you get more bang for your buck. So that’s why we say that.

Joe: Cool. All right. good luck with the Subaru, and the mountain biking, and the fly fishing.

Al: Yeah.

Joe: You ever fly fish, Al?

Al: I never did, although I’ve got a brother-in-law that loves fly fishing, and we did a practice session on, a lawn, and he said I had pretty good form.

Joe: Okay.

Al: But I, never actually executed.

Joe: Are, you going to at any point? No. Does that… No? Doesn’t. Does it excite you at all?

Al: No, ’cause, I mean, the… What, they do, the fly fishing, and then they, The, whole act of it’s kinda cool, but then you catch a fish, and then it’s like, ew, they gotta take the bloody hook out of the mouth, and then they throw it back in.

I… That’s not for me. I’m, not a fisherman.

Andi: And if you’re vegan, it’s not like- I’m not … you’re gonna eat it.

Al: No. and he, my brother-in-law, he’s not necessarily a vegan, but he does… he throws them, catch and release. That’s, what most fly fishers do, as far as I understand.

Andi: I was just talking about you.

It’s not like you’re gonna go out fishing, because it’s not something that you’re gonna take home and put on the grill.

Al: actually, I probably would.

Andi: Oh, okay.

Al: Because I, I’ve, kind of gravitated- Not a strict vegan … kind of gravitated to more of a pescatarian with light dairy, if I have to categorize myself.

Andi: Cool.

Al: Yeah.

Joe: No, I… have you ever seen A River Runs Through It?

Al: Yes. Yeah. I, mean-

Joe: They didn’t catch and release. They put it in those little, like, satchels.

Al: I know, because they lived in Montana. Th- this is California.

Joe: You don’t think California, they like fish?

Al: I think they tend-

Joe: They just like it for the sport.

Al: They like it for the sport is what I’ve seen and heard.

Joe: Okay.

Al: But I’m n- I’m no expert.

Joe: You… I bet he’s got one of those satchels.

Al: Yeah. Maybe so, huh?

Joe: Y- right? You know what I’m talking about? It’s like- A fish- okay, a fish basket

Al: Fi- yeah, we knew what you meant. I like your word there.

Joe: Yeah. S- I call it a fish satchel.

Al: Fi- I call it a, yeah, a fish-

Joe: A bin- …

Al: a fish bag.

Joe: Yeah, a fish bag.

Tax Bracket vs. Effective Rate: The Roth Math Most People Get Wrong (Mike & Carol, FL)

Joe: What do we got here? We got, “Greetings.” This is Mike and Carol from Florida with a follow-up.

And by the way, I do drink plenty of”-

Andi: Caipirinha …

Joe: caipirinha every summer- Yeah … since a trip to Rio. So you gotta remind me, from Mike and Carol in Florida.

Andi: S- so they actually did, write in and said that they drink caipirinhas, and I believe that you said that you’d never heard of that and didn’t believe it existed.

Joe: No. Still, I still don’t believe it. Still don’t believe it. “If you like gimlets, gin and tonic, et cetera, you should try one. When deciding on Roth conversions, you mentioned I’d be in the same tax bracket in retirement as I’m making now part-time.

My question, and something I haven’t heard discussed on the show, is, the difference between my tax bracket and the effective rate. I’m sure Al will have some thoughts. If I do Roth conversions of $180,000 this year or spread over a couple of years to fund a year of tax-free spending, I’ll pay tax today in my current tax bracket of 22 to 24%.

If I wait and take the $180,000 out of my traditional 401(k) after retirement, the tax will be based on my effective rate. So pre-Social Security, about 10 to 12%, and post-Social Security about 15%. How do you figure that into a plan for Roth conversions? All the other details suggest, or in my first email that Joe and Al responded to maybe a month ago, and that was probably-

Andi: Which now is about 6 months ago.

Joe: like a year ago.

Andi: So I included some of the relevant information from their previous question, on the next page, and then the recap at the top actually has their numbers from the previous question.

Al: Okay, so we’ve got almost $6 million. 1.6 million in retirement, 300,000 in brokerage, 500,000 in Roth, and another $2.5 million plus in company stock, employee performance, y- you know, restricted units, things like that.

So-

Joe: It would have had to been because of the, the RMDs

Right?

Al: no, they’re only 56 and 49. What are you talking about?

Joe: he’s saying how would… W- we stated- … that he would be in the same tax bracket in retirement, and he’s like, how do you figure effective rates? When I’m in the 22 or 24% bracket today-

Al: Sure …

Joe: he’s thinking he’s gonna be in the 10 or 12 or 15% post-retirement.”

Al: For… y- yeah, until RMDs kick in and Social Security and other stuff like that. Yeah, I mean, I’m not sure I have enough information that-

Joe: I’ll keep reading, but I don’t know-

Al: that… But that’s- I,

Joe: I don’t remember-

Al: That’s the old email there … ”

Joe: So how much 401(k) would you convert to the Roth, and when, if you were me?

After retirement and before Social Security, I could draw the $180,000 needed from traditional accounts to the 10, 12, 22% tax brackets. I could liquidate the $180,000 from the brokerage with the first $130,000 of gains at 0% tax, but only if I don’t take taxable withdrawals from retirement accounts that would push up some cap gains in the 15% tax bracket.

I’d be interested in your thoughts. Should I alternate years? I want to avoid 30% tax brackets, and wonder if we can stay mostly out of the 22 or 24% tax bracket in retirement, 0, 10, and 12% for

retirement withdrawals or conversions, and 0 to 15 to 18 on capital gains. If so, does it make sense to pay 24% to convert for the next three to seven years while I’m still working, once taking Social Security using my remaining traditional money for income and maximize the 12% tax bracket, perhaps a qualified spear at some point?

Combining the Social Security and pulling a remainder from my bo- brokerage would produce $180,000 needed, and we could live- We … or we could leave the remaining brokerage to the kids with the stepped-up in basis and no immediate tax.” So this was the original email.

Andi: That’s part of it, yes. Does that give you enough information?

I can try and dig up the r- whole thing if you’d like.

Joe: No, that’s fine.

Al: That’s enough.

Joe: But he’s like, okay, I got a follow-up question, and we said that you’d mentioned I’d be in the same tax bracket in retirement as I’m making now part-time.

Okay

Al: if we, s- if, we said that, that was because of required minimum distributions and things like that in the future, not, right off the bat.

Joe: what’s he making part-time?

Al: I don’t know

But I think the essence of the question as, I see it, Joe, is, you know, we talk about marginal rates, 22, 24%, but in his case, some of his will be taxed at zero because it would be probably long-term capital gain.

Joe: Right.

Al: Some taxed at 10%, and a little bit, and some taxed at 12%, and maybe a little bit in ’22.

So how do you think about Roth conversions in, that case? And to me, it’s pretty simple. If you’re, in the 12% bracket, yeah, I get some of it’s taxed at zero, some is taxed at 10, some is 12. Take advantage of it. That’s, about the lowest brackets that we’ve seen, that I’ve seen in my, in, my career.

I would, yeah, when you, do your Roth conversions to the top of the 12% bracket, yeah, some is taxed lower than 12. Great. That’s even better.

Joe: Yeah. You have to, I mean, w- when we look at effective versus marginal- You look at your marginal rate of what your RMDs are gonna look like, because those are gonna be taxed at that marginal rate.

Some of it w- how do I say this? If, we said that we, he’s gonna be in the same tax bracket, I’m working off of information that I’m just getting from- I,

Al: I, I know. We, don’t have it all in front of us. But, let me stop you one second. If he’s 56 and 1.6 million in retirement, it could, double twice- For sure

before RMD, right? So we’re looking at, we’ll just call it three to six. Could be six million. And when you take an RMD on six million, it puts you up there in higher brackets. So if we said something like in retirement, that’s what we meant.

Andi: His previous email, relevant sentence, “56-year-old semi-retired physician making 180 to 200k per year working part-time.”

Joe: So he’s making $200,000 a year part-time, and he’s in the 22% tax bracket.

Al: Yeah.

Joe: He’s married? Single?

Al: He’s married.

Andi: Mike and Carol from Florida. Yeah.

Joe: Yep. So he’s in the 22% tax bracket. He’s gonna work part-time. And then when’s he gonna stop working, where he’s gonna be in the 0% tax bracket? Yeah.

Andi: So does it, do you convert him now?

he said he intends to work part-time as he is now for another three to seven years, and Carol will likely continue her job until he retires, but not a second longer.

Joe: So he’s in the 22% tax bracket. The RMDs are probably gonna be in the 22% tax bracket. I think so. So that’s why, yeah, you wanna convert a little bit now in the 22% tax bracket.

Al: Yeah, and then in three to seven years when he retires- Convert the rest … you do more.

Joe: Yeah.

Al: Yeah, ’cause now you got even lower brackets.

Joe: Right.

Al: Yeah. So, so our concern is when you have a lot of deferred money, once RMDs, required minimum distributions, hit, then you’re gonna be in a higher tax bracket. So we’re not necessarily looking at what bracket you’re in as soon as you fully retire.

That is a low bracket. You should do more conversions then. We’re thinking if you don’t do conversions, what’s it gonna look like by the time you turn 75?

Joe: Yeah, you, gave up those lower brackets.

and then you’re gonna be… And then all of that is pushed out at higher brackets. So you wanna even out the tax burden- Bet

over your lifetime.

Al: Yep …

Joe: not defer, not kick that can down the road.

Al: That’s right. Remember that graph we used to draw?

Joe: Yes. I haven’t drawn in a while.

Al: Me neither.

Andi: Ask one smart question about effective rates versus tax brackets, and it opens up the Pandora’s box of provisional income, capital gains stacking, future required minimum distributions, and a half dozen other moving parts. You see, Roth conversions sound simple: convert some money, pay the tax, tax free gains for life, Bob’s yer uncle as they say here in Australia. But the reality is, if you get just one thing wrong when you convert, you may end up handing the IRS tens of thousands of dollars more than necessary. Please don’t wing it, even if you are an accomplished engineer with a complicated spreadsheet and 137 open browser tabs. If Roth talk makes your head spin even a little, it’s time to let a pro pressure-test your plan. The experienced professionals on Joe and Big Al’s team at Pure Financial Advisors are seasoned, they’re trained, and they’re certified to do exactly this, all day, every day. They’ll run your actual numbers, model your Roth conversions across your whole retirement, and show you sophisticated strategies to keep more of your money in your portfolio instead of going to the IRS. Now let’s be clear: a financial assessment is NOT a rip and read spitball for the entire YMYW audience. When you meet with a member of the Pure team one one one, either in person or online, you get a comprehensive review that’s tailored for your exact circumstances, your tolerance for risk, and your unique needs and goals. Like a spitball, the assessment costs nothing and puts you on the hook for nothing. Click or tap the link in the episode description, or call 888 994 6257 and book your free financial assessment right now.

Should the NEC Go to the Roth? The 401(k) Decision (Westley & Buttercup, TX)

Joe: Oh. Hey, YMYW. Westley and Buttercup here from Dallas, Texas area.

Al: Okay.

Andi: Do you know that one? Westley and Buttercup?

Joe: Do you know it? No.

Al: Yeah, we got… we have a cheat thing here. Princess Bride.

Andi: Yeah.

Joe: Oh, yeah. Okay, yeah, Buttercup. I love that movie.

Al: Yeah. I- classic.

Andi: You love that movie? Really?

Joe: Princess Bride? Yeah.

Andi: Yeah. Wow.

Okay.

Joe: Yeah.

Al: That’s-

Andi: Here they are …

Al: the-

Andi: Westley and Buttercup.

Joe: Yeah.

Al: Yeah. I hadn’t seen that in a long time, and my brother, it, was talking about it, two months ago, so we watched it.

It w- it, it was, good.

Joe: Yeah. Yeah, the inconceivable guy? You know, whatever. You know, the short, guy.

Al: Yeah,

Andi: Is it incomprehensible?

Joe: Incomprehensible- Was it incon- … or incomprehensible … was it inconceivable? Yeah.

Andi: Yeah.

Joe: Yeah. my business law professor at University of Florida looked and s- talked just like him.

Al: Oh, just like that? Just like that dude. Oh, that must have been quite a class.

Joe: It was quite the class. All right. Let’s see. “Long time listener, first time writer. Love the show. First and foremost, Andi deserves a raise.”

Al: Oh,

Andi: thank you Westley and Buttercup.

Al: That was, wow. Th- so they, got into our payroll records there.

They l-

Joe: yeah. They, apparently. Leaky. Westley drives a ’25 Ram 1500, and Buttercup a ’24 Wrangler.

Al: Ayoh. Okay.

Joe: Once in a while our near 16-year-old Beaker, half beagle, half cocker spaniel… Is that Beaker, right?

Andi: I think Beaker from the Muppet Show. You know, the guy that goes, “Meep, meep.”

Joe: Look, what, oh, you think that… Oh, that, all right.

Yeah, that’s-

Andi: I think that’s where the name comes from.

Joe: Okay.

Al: That, that sounds right.

Joe: Isn’t then Beaker the one with the chef, the one, Hortons Eat?”

Andi: well-

Joe: With the chef, with the-

Andi: Yeah, I think, I think you’re right. Yes.

Joe: Yeah, I think so. And then the Beaker’s the one that kind of goes around with him?

Yep.

Al: Yep. Yeah, there you go. look at you.

Joe: I- I’m on my A-game here today.

Al: Apparently. Look at that.

Joe: Yep How do you do?

Al: You can even imitate just like Andi.

Joe: Oh. See, Andi and I could go on the road. She could be Beaker and I’ll be the chef.

Al: Yeah. Then I can- … then I can finally retire.

Joe: Yeah. There you go.

all right, so we gotta, let’s see. “Rides along with us on our journeys through the fire swamp o- or pit of despair.”

Andi: In Dallas? Huh. What does that mean?

Joe: Wow. Fire swamp or pit of despair.

Al: Don’t know.

Joe: Let’s see. Let’s keep reading. if you’re buying during this pit fall, we’re both drinking an old fashioned.

Okay. I’ll buy a couple cocktails.

Al: Yeah. I’ll pitch in. ”

Joe: My question has to do with Roth.” Okay. “Which I’m sure you heard about, this once or twice on your program. I’m very lucky to have a large NEC.”

Andi: Non-elective contribution.

Joe: A non-elective contribution, “From my employer into my 401(k). I always contribute my portion to the Roth.

But starting 2026, we can elect the non-employer, or non-elective contribution- to also be Roth.” That’s just a… W- he’s talking match.

Al: Y- no, he’s not. he’s saying he’s required to make a contribution.

Joe: Oh, so this is like a, in a 401(k) ? I thought that was, like, only 401(k).

Al: I’ve only heard of that at, like, a university.

My brother had that. It, was a required contribution- they took right out of your pay. Yeah.

Yeah.

Andi: You know what? Interesting. Beaker was actually the assistant to Dr. Bunsen Honeydew, not to the chef.

Al: Oh.

Joe: Oh.

Al: So much for your road show.

Joe: There goes.

Andi: Anyway, as you were.

Joe: All right. Okay. So then he could take his own non-elective contribution starting in 2026, and it can go into the Roth.

Al: Yep.

Joe: Okay. So would this be a smart move?

Al: Okay. ”

Joe: For context, we’ll be in our f- mid-40s approaching $1 million invested, $410,000 in a tax-deferred account, 360 in a Roth, 210 in a taxable and around $25,000 invested in an HSA.” We also have a

MBCBP. Let’s see.

Al: Some kind of pension. That’s all I got.

Andi: I’ve got market-based cash balance plan.

Joe: Oh, yep. That’s them.

Al: Oh, look at you. Okay. ”

Joe: It’s pretty small, but building, and will also be tax-deferred, so we’re creeping up into the 24% federal income tax bracket in maybe five to seven years. Expect it to be in the 32% or 35% tax bracket, hopefully until retirement, say 15 years in those brackets, 22 years total.

Since we sadly don’t have the cheese to do everything we want, we have to make choices.” We all do.

Al: Yeah, we do. ”

Joe: In this case, our budget allows us to max out both backdoor Roths- Okay. “If the NEC remains tax-deferred or we reduce the Roth IRAs and 401(k) contributions so the NEC can become Roth at each paycheck.

In the numbers, changing t- 42,000 NEC for the year to Roth would be the same expense as one Roth IRA, as both would take about $10,000 of earned income to make that happen. So while enjoying this Woodford Old Fashioned, what’s the spitball? $42,000 tax-deferred NEC, 24/5 employee Roth 401(k) and two Roth IRAs, or $42,000 in the Roth NEC, 24/5 in the employee Roth 401(k) in just one Roth IRA?”

Al: Let me, s- let me simplify this for you.

Joe: Okay.

Al: So w- it would be, the first one is 42,000 in tax-deferred, 40,000 in Roth, 82,000 total.

Joe: $42,000,

Al: In tax-deferred …

Joe: okay, and then 24/5 in the employee 401(k) and then-

Al: Plus the two Roth …

the

two Roth IRAs. Yeah, yep. Yep. So 42, 40, 82,000.

Joe: Total savings.

Al: Yeah. Roughly half deferred, half Roth.

Joe: All right. Yep.

Al: Or 74,000 all Roth. I like that one better.

Joe: 74,000 all Roth is way, worth way more than-

$84,000.

Al: 82. 82,000. Yeah, I, I like that better. O- I think that’s a better use of their extra 10 grand.

Joe: Yep, and I believe they probably can do a backdoor Roth IRA.

Al: they’re already doing two.

Joe: They can only do one Ro- It- Oh, is that because of cash flow con-

Al: That’s cash flow

Joe: oh, got it.

Al: Yeah,

Joe: All right. Yeah.

Al: Yep.

Joe: That’s what I would do. I would do option two.

Al: Yeah, me too.

Joe: Like, if you think about it, what would you rather have, $100,000 in a 401(k) or $80,000 in a Roth IRA?

Al: Yeah, I’d do Roth. Yeah.

Joe: I would much rather have $80,000 in a Roth IRA than $100,000 in a 401(k).

Al: Right.

Joe: ‘Cause it’s, the 80,000- It’s all tax-free … is all mine.

Al: All growth income, principal in the future-

Joe: Everything …

Al: tax-free.

Joe: All future growth, all future everything is all mine.

Al: Y- you know what, Joe, as I look at this, better yet, why not go ahead and still do the two backdoor Roth IRAs, ’cause they got 200,000 in taxable.

You got money to do it.

Joe: Yeah.

Al: You don’t have to do it through income. They have income, so that’s what I would do. Then now you really got something going.

Joe: Oh, I love this plan. “Any thoughts or preference on reducing 401(k) or Roth IRA?” No. Another scenario is to keep, the deferral like choice one, but if the market takes a steep dive, then just do some opportunistic in-plan conversions and try to find that tax money somewhere.

No. Go all Roth, and then when the market dives, you do a conversion and find that Roth money elsewhere.

Al: Yeah. Or yeah, with what you have. You already have 400,000 in 401(k) deferred.

Joe: Yep. “For future, planning, once in the 32% tax bracket, I do plan to make all contributions to the 401(k) tax-deferred, while contributing to backdoor Roth IRAs in a maxed HSA.

If that works out, roughly 15 years of heavy tax deferment is gonna leave me with a lot of IOUs, to Prince Humperdinck, AKA the government.”

Al: Yeah. ”

Joe: It makes me want to go all-in Roth now, but I have to do so at a cost somewhere. Love listening, and thanks for all you do. Westley. P.S. Watch out for the man with six fingers.

I am Roberto Montana, Cal- Montana.”

Andi: Inigo Montoya.

Joe: I am-

Andi: You killed my father. Prepare to die.

Prepare to die. There it is. I knew it sounded-

Al: You, knew it … something close to that. Excellent. Good for you.

Joe: Yep,

Al: Okay, yeah, stick with Roth. What, what happens when they bump into the 32? Does your advice not… Does your thoughts change?

Not advice.

Joe: how much do they have in deferred? 400,000? I think

Al: they got 400.

Joe: No, I don’t know. I just-

Al: You’d plow it into Roth.

Joe: I do, because it-

Al: Yeah …

Joe: it’s, hard to get the money in there.

Al: I know.

Joe: he’s got the plan that allows the Roth to put a ton of money into a Roth.

Al: Sure.

Joe: I’d like tax-free. Even though I’m giving up the tax deduction today-

I’m gonna be a lot happier when I have that big Roth balance in the future.

Al: Yeah. So I would probably go back to tax-deferred myself, get the tax deduction, and then I got many years to convert. That’s what I might do. Y- you could make an argument for either one.

Joe: Yeah. No, that’s probably the, smarter tax in financial planning move.

Al: Yep.

Joe: But the real life move-

Al: Yep. Yep …

Joe: I don’t know. I like Roth.

Al: Yeah, I know you do.

Joe: All right, that’s it for us. Losing my voice.

Al: Thank you, Andi.

Joe: Thank you for

Andi: taking the time. Appreciate it.

Joe: Yep. show’s called Your Money, Your Wealth. Keep the questions coming in. We’ll get to them at some point. we’ll see you next time.

Outro: Next Week on the YMYW Podcast

Andi: Mike in San Marcos, Mike in Texas, Aaron in Syracuse, Bob the Builder, Lu, Marion, Tony in New York, Rajesh, and John and Peggy, next week on YMYW, Joe and Big Al go rapid-fire for ya on funding a Roth with pension money, whether inflation breaks Roth conversion math, rolling a UTMA into a 529, whether four million dollars is really enough to quit at 61 and more. Plus the question that matters most: can Wayne in Long Beach New York finally buy that Audi? Watch or listen to find out next week.

Your Money, Your Wealth is your podcast, and we want to hear from you. Join the conversation in the comments on YouTube. Let us know what you think about today’s episode. Tell us your Roth conversion thoughts. Tell us if we got something wrong, that’s always a favorite! And if you’re one of the 44% of watchers who isn’t subscribed to the channel, why not fix that right now?

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.
_______

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