When You Retire, DO NOT Convert Until You Do These 3 Things

本站添加: 2026-05-09

[00:00:00]Most people believe retirement is the best time to convert to a tax-free Roth, but it's also when the most expensive mistakes happen. In this video, I'll show you the three things you need to check before converting, so you don't pay higher taxes or create costs you could have avoided. I want you to meet Ed and Gail. They're both 62, newly retired, excited about travel and grandkids, and for the first few years they're planning to live mostly off their brokerage account. Their taxable income in that first year is estimated at about $70,000, which is a big drop from what they were earning while working. And this is exactly where a lot of people start thinking about Roth conversions. This is what we call the tax valley, a period where your income is temporarily lower before things like social security and required minimum distributions start to show up. They've watched enough of our videos to know this is the window. So, the idea comes up to convert $100,000 to Roth while income is low. And I love proactive tax planning, but here's the trade-off. At their income level and ages, they'll qualify for health insurance subsidies through the Affordable Care Act, which is the health insurance marketplace for people under 65. Because their income is lower, their expected premium for a benchmark plan combined is about $7,000 per year. So, here's the Roth conversion issue. That one decision could push their income from $70,000 to $170,000.

[00:01:21]And at that level, they'd lose those subsidies entirely. Their health care cost doesn't go up just a little, it jumps from $7,000 per year to closer to $26,000 a $19,000 increase. But let's take this a step further, because this is where the numbers really start to shift. When you add in the actual tax on that $100,000 conversion, now you're layering federal tax, state tax depending on where you live, and this additional $19,000 of health care cost. So, what looked like a smart move because of the tax bracket may actually be costing you far more than when you look at everything together. But that's not all.

[00:01:57]Next year when Ed and Gail turn 63, their income not only affects current health insurance premiums, but will now start the clock affecting Medicare premiums 2 years later when they turn 65. That $100,000 Roth conversion alone may not be enough to trigger it, but a higher amount certainly could. Medicare premiums are based on that 2-year look-back, and this potential increase is referred to as Irma. Basically, higher income may equal higher premiums, and these are not gradual changes. You cross certain income levels and your Medicare premiums shoot up at each level. Something to watch for throughout your retirement years. So, now you've got higher costs today and potentially higher costs built into your future as well. But here's the key. The goal is not to avoid Roth conversions because of health care. The goal is to recognize that health care costs are part of the equation. Here's the framework so you can make a good decision. When you're evaluating a Roth conversion, you have to look at the full cost, not just the tax. That includes federal and state tax, but also the increase in medical premiums, whether that's losing ACA subsidies or triggering Irma later. So, you're treating those lost subsidies and higher premiums just like a tax cost, and then you can make a fair evaluation whether the conversion still makes sense. Sometimes it will, and sometimes it won't. Unfortunately, it's not a black and white answer because we do see times where high Roth conversions really outweigh any increase in medical.

[00:03:25]However, more often than not, the answer is somewhere in the middle, where you're converting enough to take advantage of lower tax rates, but not so much that you trigger unnecessary costs. And that's the real objective, finding what we like to call that sweet spot. Check number two. At first glance, these two couples look almost identical. Same portfolio value, same ages, even similar income sources. It would seem that their Roth conversion decisions would be the same.

[00:03:52]But, here's where a major difference lies.

[00:03:54]Bob and Betty, they have a mix of different account types with different tax characteristics. They've got money in Roth accounts, in a brokerage account, and some in pre-tax retirement accounts.

[00:04:06]Dan and Diane, on the other hand, they look more like a typical lifetime 401k saver. They've diligently saved into their 401ks, and now the majority of their assets are pre-tax.

[00:04:17]Here's why this matters. Roth conversions are really about one thing, paying a lower tax rate today than you would in the future. But, predicting what tax rates will be in 15 to 20 years is uncertain, and this uncertainty can only be managed one way. Because Dan and Diane have limited options with their large pre-tax savings, most of their future income, it's going to be taxable.

[00:04:39]So, for them, creating flexibility that doesn't currently exist is more of a priority. But, Bob and Betty are in a completely different position. They already have flexibility. They can pull from their brokerage account when they want to keep income low. They can use their larger Roth money selectively when they want to avoid taxes.

[00:04:59]And even required minimum distributions from those pre-tax accounts don't set off that tax bomb. In fact, they can stay in lower tax brackets with that IRA income. And this is where the general advice starts to fall apart because it assumes everyone looks like Dan and Diane. It assumes you need to convert aggressively early or you're going to regret it later. But, what if you've already solved part of the problem? Bob and Betty don't need to force income into a specific year. They can smooth their tax situation over time. The key is to recognize where you stand. If you're heavily weighted towards pre-tax accounts, then yes, conversions are likely an important part of your strategy, assuming you have the money to pay the tax on that conversion. But, if you already have a well-diversified mix, the pressure to act is lessened because you have the flexibility no matter where tax rates are in 15 to 20 years. But, we haven't covered everything yet, because even if you understand the cost, and even if you understand the flexibility, there's one more piece that can completely throw off your timing. Take Brian and Jessica. They built a successful business, and they're ready to step away. That scenario of working one day and paying a lot of tax, and then retiring into a low income situation, well, that's not them. And this is the third check for you. You see, their timing is different. Their business sale is structured over multiple years. They're retiring, but payments continue into the next few years with a larger income payment coming in 2027. For you, your taxable income may not drop right away. Perhaps it's a business sale, or a deferred compensation plan that'll start paying out. And that means your true tax value doesn't actually begin until several years later. But, there's something else that can change the timing, and it doesn't have to do with more income, but rather where you live. So, I live in California. I see a lot of people leave the state in retirement, and taxes are a big reason why. A comfortable retirement income can easily put you in a tax bracket of 9.3% here in my home state.

[00:06:58]We definitely have that sunshine tax.

[00:07:00]Living in high states like New York, New Jersey, Massachusetts can cramp your spending. Compare that to states on the other tax extreme, like Texas, Nevada, or Florida with no state income tax.

[00:07:12]Where you live and plan to live affects Roth conversions. Let's say you live in California and plan to move to Florida.

[00:07:20]If you convert while in California, you're voluntarily paying a state tax that you could have completely avoided just by waiting.

[00:07:27]Your tax window isn't defined by your retirement date, it's defined by when your income actually drops, and where you're living when it does. And once you start looking at it this way, evaluating a Roth conversion is not a standalone decision. It has to be done within a full retirement income plan. If you want to take the next step, you need to watch this video where my business partner Alex breaks down what you can actually spend from a $3 million portfolio. Alex will see you over on that video now.