Adam Talks - Avoid These Costly Roth Conversion Mistakes

[Music] hi this is Adam Bergman on today's Adam talks I'm going to be talking about Roth conversions and five pitfalls to avoid so Roth conversions are actually a very hot topic and Ear why because people will want to think about converting pre-tax IRA or 401k money into Roth and what is the purpose behind all this well when you have a pre-tax IRA or 401k great right you're taking advantage of the fur all your money is still growing without tax but ultimately when you take that money out either gonna pay tax or if it's prior to 15 age 59 a half you're also gonna pay a 10% penalty whereas a raw is an after-tax account and so long as that Roth has been opened at least five years and you're over fifty nine 1/2 when you take that distribution the money is not subject to tax anymore its tax exempt excuse me tax free so it's very advantageous to move money that you would pay tax on at a later date to an account that you never have to pay tax on right that's hitting the ultimate homerun the grand slam in the tax world right as a tax lawyer I keep repeating this in my podcast the first two things we're taught is you wanted to fur tax okay and you want to get a tax deduction for your clients those are two of the really the tool I would say most important things that you want to provide a client if you're a good tax occur attorney counterattacks professional but the hall-of-fame would be if you can exempt that person ever from paint tax in most cases is not possible if you're not dealing in a retirement world it's almost impossible to eliminate tax unless you've got a lot of losses so deductions are good the furl is good but ultimate if you can be tax free it's great so people look to do Roth conversions but there are five main pitfalls you need to avoid number one it's got to be permanent so make sure you're certain about doing this Roth conversion prior to the Trump tax plan you could actually revert back across conversion so if you did a rocks conversion in April 2000 18 you can turn it back before we follow your return or 12 before 1231 you can turn it back so let's say you thought Apple stock was gonna go up up up up and you do a Roth conversion because you want to lock in all those tax free gains and you now Apple Apple just drops drops drops and now you don't want to do that Roth conversion anymore because you don't want to pay tax at Apple at 500 when it's now at 400 so you just rescind it that doesn't work anymore now it's permanent so once you tell your custodian and fill into paperwork to do a Roth conversion stock it's permanent so you got to be sure it's probably a long-term play you got to be really sure what you're doing number 2 ok you need to make sure that you can pay the tax so when you move money from a pre-tax to a Roth it's subject to tax it's not something to tack that minute because there's no withholding tax on conversions but it would be subject to tax when you actually follow your tax return so if you did a Roth conversion in February in 2019 the tax would be due in April 2020 when you file your individual tax return your 1040 how do you calculate the tax whatever the amount of the conversion is cash you converted or the fair market value of the asset that is added to any income you've earned and the Advocate of all that income is then subject to whatever tax bracket you are so if you are gonna be tight with money you don't think you're gonna have enough money to pay the tax maybe you shouldn't do the conversion you can also do part conversions you don't have to convert everything at once right if you have a hundred thousand dollars in an IRA a traditional IRA maybe you convert ten thousand each year or 20 thousand over the next five years so you don't have to pay tax on the full hundred if you can't afford it now if you have NOL net operating losses that can eat up some of that tax then conversion could make even more sense because the tax may not be so difficult to deal with third is if you can't afford it it's probably not a great idea to pay the tax from the conversion right if you're converting a hundred thousand dollars and to tax is gonna be $25,000 taking that $25,000 out of that hundred to pay the tax so that the Roth is now left with 75 instead of 100 usually doesn't work out because the whole point of the Roth is to have the tax-free growth and haven't as much money as possible the Roth to grow without tax by taking that 25 out to pay the tax you're probably better off to just leave it in the trishul IRA and let it grow without pulling it out and pay the tax in 10 15 20 years down the road or when you're subject to RMDs at 70 and a half so I'm not a big fan of doing the conversion of pulling the tax out of what you convert it to pay the tax I really don't think that makes a lot of sense your age is important that's the fourth big pitfall if you're 65 70 Roth conversion may not make a lot of sense because generally to play with the Roth conversion younger you are more growth more tax for growth opportunity then if you're older right if you're 30 years old and to convert to a Roth versus 70 you got 40 years and instead of maybe 10 or 15 to take advantage of the tax rate growth so just be cautious of your age because you don't want to do a permanent conversion since you can't rescind it and now she's stuck with it you pay the tax now and you don't have enough growth in you because you're gonna need to start pulling money out because you're older and you need that money or you're not healthy you may need that money for other purposes or you're sick so you got to think of your age your health condition I think that's really important also the fifth I would say is your confidence in the investment so if you're super confident that you're gonna hit a homerun this is the next Google investment in the next Apple there's real estate projects amazing it's gonna be an unbelievable success then a Roth conversion can make sense because you're locking in that growth right if you're investing in the next Google and a hundred thousand dollars and in ten years we were twenty million then you wouldn't you would want to own in a Roth right because so long as you're over fifty nine and a half and the Ross spent open five years never pay tax on that twenty million dollars of growth that is credible right that's what we all want that's a dream but if you're not so confident and that hundred thousand dollars and up being the next failure and now it's maybe worth zero in five years now what did you just do if you did a Roth conversion you pay tax to the IRS at $100,000 sent them twenty five thousand let's say and now you guys zero to show for it because the investments worthless so be cautious if it's if you're not really sure then maybe you kind of leave it or do it slowly by year by year if you're super confident you're gonna hit a home run then the Roth makes sense and you want to do it obviously at a lower value you never want to go wrong conversion at the highest value you want to wait if you can to a more palatable value because you paying tax on that value so in private investments you have to understand where the valuation lies public investments like public stocks it's the values the value like Bitcoin it's gonna tell you what the value is yeah you may think Bitcoin at 9,000 is is cheap and it's gonna go to 100 thousand ok Roth conversion make sense if you're not sure where bitcoins gonna go maybe you just kind of leave it in the pretest because if a coin goes from 9 to 2 you just lost a lot of money and you pay tax on it which is kind of a double whammy so those are the five things five pitfalls you want to avoid you also want to think about really where you are in your life the younger you are if you can pay the tax you want to consider it especially if you're confident and investments if you can pay the tax personally you've got other losses to absorb the tax it makes a lot of sense believe it or not the IRS loves conversions you may say well that doesn't make sense Adam you're obviously wrong why would the IRS love Roth diversion you're gonna have a whole lot of money tax-free in 10 15 20 30 years why do they want that to happen don't they want you to have more money in a taxable account like a pre-tax retirement account the answer is yes and no they care governments care believe it or not they care about elections and they care about the next four eight years they don't really care about the next 20 30 or 40 years they care about a budget and how much money they're gonna have to spend in the next two four six eight years so what a Roth conversion does is gives them more money right because you're paying tax on that money and that tax money is going to the Treasury and the Treasury can use that to buy invest in the military build roads help social security education healthcare whatever they use it for 20 30 years they may be long gone congressmen senators are gonna be doing something else and that's someone else's problem in their mind so yeah overall the government is in a worse position in twenty thirty years with Roth conversions because there's less taxable money but who cares right in their mind they're gonna be doing something else for long gone the last thing I want to say is and I get this a lot could the IRS change the rules on us and start taxing Roth IRAs believe it or not it could I hope not because a lot of my money is Roth I wrote a book on the Roth IRA I believe in it I believe in the value and doing Roth but it could happen believe it or not before 1982 Social Security payment we're not subject to tax today they are so these rules change they shouldn't it's not like you can play a football game right it's not fair played a football game and then suddenly after halftime the refs come out and say well it's no more for down football it's three down football you're playing like the CFL that doesn't seem to be right but the government can do it if the government wants to do and who knows what could happen could they limit roth iras yes president obama try to limit it didn't pass a five million dollar cap let's say because they just eliminate roth I raise and make everything taxable who knows I hope not I'm 44 I'm young I'm most of my investments and savings are Roth so I'm hoping they keep their word and I can pass this money on to my spouse my children without tax and they can use the money with on tax but but who knows but in either way if you want to do a conversion or not remember the five pitfalls I just mentioned it's it's you got to be certain about it remember your age you got to be able to afford the conversion be certain of your investments and you don't want to pay the tax out of the conversion Adam Bergman are a financial I hope you found this podcast helpful cyfle please subscribe to our Channel please like it give comments please leave and we'll respond really appreciate your watching and listening and thanks and until next time you

Channel: IRAFinancial

Views: 142,089

Keywords: Roth conversion, Roth IRA, tax-free plan, Traditional IRA, 401(k), tax-free distribution, roth conversion mistakes

Id: WHQxajM5vf8

Length: 11min 5sec (665 seconds)

Published: Wed Dec 04 2019