Best Time for a Roth Conversion may be right now!

right now may be a very good time to complete a roth conversion that is the subject of this video [Music] hey welcome back to another episode of the financial fast lane my name is lane martinson so why is right now possibly a very good time to complete a roth conversion first let's talk about why we would even want to do a roth conversion okay so most retirees most people that are saving for retirement they do so in tax deferred accounts right so like your 401k at work or you may have a tsp or a 457 you might have a sep ira or a simple ira there's many different types of qualified retirement accounts but they they have something in common and that is that they when you make a contribution you get a tax deduction meaning that the money you put in is not taxed right and so and once that money is in that tax deferred account an ira or a 401k that money grows tax deferred which is nice and wonderful but in retirement when you start to take funds out to live on all of the gains all of the contributions 100 percent will be taxed at whatever the tax rates happen to be this gives a lot of people a lot of concern because there's what we call tax rate risk so if we look at our tax rates you know it may feel like taxes are high but historically speaking our our taxes are actually historically low you know if we go back in time you know our top marginal tax bracket the highest it's ever been was 94 percent so that was at the peak of world war ii i mean that was the top tax bracket but even the lower income brackets were really high 60 percent 50 percent and so we've had really high taxes in the past and even through like the decade of the 70s top tax bracket was 70 percent today the top tax bracket is 37 percent when we look at it taxes really are historically low now our current taxes today are as of right now they're temporary meaning that they are not permanent so what that means is if you're in the 22 tax bracket today come january 1st 2026 that is going to automatically go up to 25 percent if you're in the 24 tax bracket today that is going to be going up to 28 and so in the very least case we know that taxes will be higher in the future and you know many people believe the taxes will be probably considerably higher than that as we move down the road because of our our huge national debt and deficits you know we're approaching 30 trillion dollars unprecedented amount of debt as interest rates start to rise we're spending right now almost 400 billion dollars a year on interest on the national debt just think about that for a minute 400 billion dollars just to interest on the debt and interest rates are incredibly low right so as interest rates start to take up that could easily balloon into a trillion two trillion dollars just in interest on the debt and so we have some some real challenges down the road and so there may be some significant pressure for taxes to be higher and if if most of the retirement accounts which is in the trillions if you if you look at all the tax deferred iras and 401ks it's a very large number and and the tax rates on those on that money can simply change depending on what the tax rates are you know of the country are so it creates a real tax rate risk if all of your money is tax deferred because you may not be able to spend as much as you think you'll be able to spend in retirement and so that's why roth conversions or roth accounts have become very popular and roth conversions but when you do a roth conversion you got to be wise because you can certainly make mistakes and end up paying more in tax so it's going to depend on your income level and you want to do tax bracket management and make sure that you're taking advantage of lower taxes tax brackets and you don't bump yourself up into the higher brackets it's usually going to be a multi-year strategy to convert why might right now be a good time to do a roth conversion well it's very much going to depend on your situation right and it will be different for everyone another good time to do roth conversions is when the market is down and so recently we've had a lot of volatility in the market so if your ira is down that's an ideal time to convert some to roth because you're converting an amount that now when the market rebounds all that growth is is tax-free and so you're able to really leverage the market being down you know most of the time when you think of the market you know losing some money in your 401k or ira is a real negative thing but if you're trying to get some money into the tax-free bucket or to tax-free accounts then you could also see this as an opportunity to convert and then as the market rebounds down the road and you get that long-term tax regrowth from the roth accounts so you know money in the roth is after-tax money but then the growth is always tax-free and it comes out tax-free in retirement there are no required minimum distributions that you have to worry about and you have much more flexibility with with a roth account and you have more predictability and that's really the big thing because if you have a certain amount of money in a roth you know what you've got and it's much easier to plan if all your money is is subject to whatever the tax rates happen to be then then you've you know with the swipe of a pan you could easily lose a chunk of your spending your retirement spending so let me do a recap this may be a very good time to do a roth conversion one because the markets are down and also it's a good time generally speaking because our tax rates are probably as low as they're ever going to be again it's not just the debt and the deficits but medicare has a major problems just in the next couple years there's going to be shortfalls social security is not is a few more years before there comes a crisis with that so we have some real financial challenges and i just don't think taxes are going to be this low in the future maybe i'm wrong i don't know but getting money shifted or contributing into tax advantaged accounts such as a roth makes a lot of sense for a lot of people now everyone's situation is unique you can make mistakes for sure so be careful i do have another video um specifically on typical roth conversion mistakes and i'll have a link here below and so you might want to check that out but i hope you found some value in this video and until the next video thank you [Music] you

Channel: Financial Fast Lane

Views: 7,886

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Id: Y-ftpKc-9KY

Length: 8min 34sec (514 seconds)

Published: Mon Jan 31 2022