Does it make sense to convert my 401k & IRA to a Roth IRA while still working?

so you've saved a majority of your money into your 401ks in IRAs and recognize that none of that money has been taxed yet and you're wondering while you're still working does it make sense to start converting that into your Roth IRAs and the decisions that you make today could potentially save or cost you hundreds of thousands of dollars in taxes so in today's video we're going to help you understand how to come to that decision also stick around to the end as we're going to share an example that shocks a lot of couples of how their taxes could significantly increase in their future also influencing how they're going to make that decision today [Music] so you're wondering if you should do a Roth conversion while you're still working this is a common exercise that we go through with all of our clients each and every year and some are doing Roth conversions while still working and some are not you see what we do is we plug all of their information into our financial planning tools which goes into way more detail than we're we're going to talk about today and it shows us what's going to projects what's going to happen in each and every year of their lives we call that a tax plan today we're going to keep it really high level and give you all the factors or I'm going to say the pieces of information that you need to know and then the factors that you need to consider to help you make that decision whether or not you should do a Roth conversion while you're still working so today we're going to talk about hypothetical Bob and Mary now hypothetical Bob and Mary they've saved majority of their funds over here into their 401ks and IRAs what they're wondering is should they do that Roth conversion to get money over into their Roth IRAs where it grows tax-free and then your future withdrawals are tax-free as well now the one thing that you have to understand is that when you do the Roth conversion you have to pay tax today at today's rate and so as we go through the scenario I think it's just important that you understand first off what a Roth conversion is It's always important that I just suggest that you sit down and talk with a qualified Financial professional as well as a tax professional before you do any sort of Roth conversion if you're not sure who to speak to you can always check out our website and see if you want to sit down and talk to us okay so let's go through first off what is it that Bob and Mary need to consider what do they need to know about themselves today but also about themselves in the future so some key things that Bob and Mary are going to need to know to be able to make that decision of whether or not they do the Roth conversion is what is their taxable income today versus what will it be in the future and also what tax bracket are they in today versus what tax bracket will they be in in the future so first off they can say hey what's their taxable income today again we're just making up a number let's just say it's a hundred and forty thousand dollars what tax bracket do they sit in so we go to our tax bracket worksheet here um Bob and Mary you'll see on the left hand side they would be married filing jointly now if you're single watching this you can do all the same exercise just fill in your numbers and instead you'd look at the tax chart for a single versus married filing jointly so married filing jointly they fall right between the 89 and 190 000 they're in the 22 percent tax bracket so right now they're in the 22 percent tax bracket and then what's their taxable income in the future well they're going to have to add up if they have any pensions plus Social Security oh and then don't forget because those IRAs 401ks none of that income has been none of that money has been taxed yet starting in your 70s you're gonna have to take forced income which they call those that that's the required minimum distributions and so don't forget about the rmds that you're going to have to take out as well now let's just say for Bob and Mary here this turns out to be a hundred and forty thousand dollars as well and the first thing we don't know yet what tax rates will be in the future let's just say it's the same the tax brackets in the future the same that they're going to be today we'll get to this and the factors to consider in a second but let's just say that puts them in the 22 percent tax bracket so when doing a Roth conversion as I had mentioned earlier when shifting money from the left hand side that 401ks and IRAs over to the right hand side that Roth IRA you're going to pay tax today and when you do that that shift adds that money to your taxable income so as you can see if you did a Roth conversion today today's taxable income 140 000 if they did a Roth conversion of fifty thousand dollars that keeps them still within that 22 tax bracket we're looking at earlier it went up to a hundred and ninety thousand dollars um and so they would pay 22 on that Roth conversion so just want to kind of give you a little bit of background here next we're going to talk about the four factors that you want to consider so that way it helps you understand if you should make that to this decision of doing a Roth conversion today or while you're still working or not so three of the four factors all depend on what you feel like tax rates will be today versus what you feel like tax rates will be in the future so let's just say our first scenario is tax rates are going to stay the same so again based on our hypothetical scenario here and you just fill in your own numbers it when I say tax rates tax rates and tax brackets so if they're making a hundred and forty thousand today today and then they're 22 tax bracket and they're doing they're looking at their future they're going to have 140 000 coming in in their future and they'll be in the 100 and they'll be in the 22 tax bracket well if they were to convert more money today um I guess they could convert more money today at 22 percent and really it's the same if they pay that 22 today or they pay that 22 in the future um so you can see there's really no change and in that case it might not make sense to do a Roth conversion now the second Factor then to consider is do you think tax rates are going to go up or could they potentially go down now if they go down then of course it wouldn't make sense right so if that 22 percent that you're seeing for your future tax bracket goes down to 20 or below well that doesn't make sense then to convert more money today at 22 because you feel like the tax rates are going to go lower in the in the future now if you feel like because of national spending and national debt in my opinion tax rates go up in the future let's say that 22 goes to 23 well converting some of your money today at 22 could then save you in future taxes it could save you one percent of future taxes so if you feel like they're going to go up doing that conversion today could help save you in regards to your future taxes the thing though here is you want to be very I'll say strategic in regards to your Roth conversion here's something that we look at when it comes to all of our clients and one one more thing I just really want to point out here is when we're talking about future taxable income I'm just giving a hypothetical snapshot in time for maybe one year in your future could this be at age 70 or 75 or 80 or 85 you really want to do this for each and every year of your life because what people don't recognize is that with required minimum distributions the amount that you're going to take out kind of does an upward curve over time and you're gonna have to take out more and more and more each and every year meaning well I've just given one number here you're taxable income could go up over time putting you into different tax brackets over time again just trying to give you information today to help you plug in your own numbers to to help make decisions or as I mentioned earlier if you're not sure how to plug in your own numbers or what to do talk to a qualified Financial professional Okay so um the thing like I was saying earlier you want to be really strategic so if we go back to our tax bracket chart here uh 2023 summary now you have to look at this for each and every year the 22 bracket goes up to 190 750 and so after that it jumps to 24 and as you can see at 364 000 it jumps up to 32 percent so if we go back to our whiteboard here um what did we say was a hundred and ninety thousand seven hundred and fifty dollars keeps you within that 22 22 tax bracket so maybe you just want to go up to the top of the tax bracket but not go over and that's taking a very strategic and annual approach um to to doing Roth conversions that's why we sit down at the end of the year with all of our clients to help them understand what is the right amount of Roth conversion for them okay so that's Factor number one if they say this same well then maybe it doesn't make sense to do a Roth conversion if you feel like tax rates on your tax bracket is going to go down in the Futures your taxable income and your tax rates and brackets are going to go down in the future probably doesn't make sense to do a Roth conversion and then if you feel like your taxable income and tax rates and brackets are going to go up in the future then it might make sense to do that Roth conversion but take a strategic approach okay so Factor number three is whether or not Congress will let the tax cuts and jobs act expire at the end of 2020 and end of 2025 right now it's scheduled to Sunset 12 31 2025. if they continue to let that expire most likely all tax rates across the board are going to go up as you can see here on the screen under number three the ten percent bracket still is the 10 bracket however the 12 percent basically the rates revert back to old rates pre-tax cuts and jobs acts so 12 percent bracket instead of 12 percent becomes 15. 22 becomes 25 the 24 becomes 28 and 32 becomes 33. so looking at our hypothetical scenario here um again future let's say the future is sometime past 2025 tax cuts and jobs acts expire well now that 22 percent becomes 25 so what was 22 we cross that out and that becomes 25 percent now all of a sudden it can save you money right converting money today at 22 percent versus paying 25 percent in your future so let's just say or to convert 50 000 today in that 20 if Bob and Mary were to convert you know fifty thousand dollars today it keeps them in that 22 tax bracket well they're going to pay um 22 percent in that 55 50 000 versus the twenty five three percent in tax savings that's fifteen hundred dollars more in their pocket versus going to the IRS plus now it's in the Roth bucket where it's going to grow tax-free and all of their growth will come out to them tax free as well so it's going to save them three percent on all of that growth um the other kind of thing to think about here is where Bob and Mary actually fall so um they're in that 22 bracket um if that expires again that puts them up to 20 the 22 goes to 25 the next bracket up is only 24. so maybe they actually are kind of doing a more strategic approach and they also want to convert some money at 24 because again that's saving them a one percentage Point versus paying 25 in their future so their decisions today to do those Roth conversions can now potentially save them money on the base amount that they're converting plus they'll get all of that tax-free growth so before I get into number four which is the factor that shocks a lot of couples of how their taxes can significantly increase in in their retirement if you're enjoying and finding value and benefit in this video and would like to see additional videos to help you minimize your taxes understand when you can retire so you can retire invest and spend with confidence subscribe to our YouTube channel that way you'll get notified as we're coming out with new videos each and every week on topics just like this also as you can see taxes are going to have a huge impact on your future and on your retirement we have a free guide to unlocking hidden tax savings opportunities you can get it at lifemoneyshow.com backslash taxes it's a free guide it's going to give you actionable advice specific to your situation of potential tax savings opportunities that might be available to you what it means is keeping more of your hard-earned retirement income more of your hard-earned retirement Savings in your pocket versus giving it to the IRS again lifemoneyshow.com backslash taxes and I'll include a link in the description below alright with that let's talk about Factor number four number four is what we call the widows tax and what that is is that if one of the two people were to pass away the remaining spouse is going to get taxed as a single versus a couple so again back to Bob and Mary here let's say they have a hundred and forty thousand dollars of taxable income coming in if we go to our chart we already know that right now they fall in the 22 percent tax bracket but let's just go down and again it doesn't matter who passes away just one versus two now tax has the same as a single and in a single tax bracket here you can see a hundred and forty thousand dollars they will jump up that remaining spouse is going to jump up to the 24 tax bracket so if we go back to our whiteboard here as married filing jointly they're at 22 percent and single 24 so now if you're thinking about it from a family long-term standpoint doesn't make sense again in this scenario to start converting money at 22 versus if one person were to pass away that remaining spouse is going to be at 24 percent and and let's just take it one step further tax cuts and jobs Act expires and that 24 percent as we talked about earlier becomes 28 so doing it at 22 percent could be a six percent Savings in taxes versus one person passing away and now that remaining spouse paying um or being in that 28 tax bracket so that's the last factor that you really want to consider of course we don't know what's going to happen to whom and when um but something that you need to think about again we're just doing a snapshot and time today hopefully this helps you but what you really want to do is this for each and every year of your life while you're working and while you're retired to see when does it make sense to do a Roth conversion hopefully this helps you in your decisions of doesn't make sense to do a Rob conversion while you're still working I hope that you found today's video again to be of value and benefit you'd like to see additional videos just like this to help you minimize your taxes help you understand more about social security and help you maximize your retirement subscribe to our YouTube channels we're continuing to come out with new videos each and every week on topics just like those look forward to our next conversation to helping you enjoy life today and being financially confident about your retirement [Music]

Channel: Sierens Financial Group

Views: 10,207

Keywords: Does it make sense to convert my 401k to Roth while still working?, Does it make sense to convert my IRA to Roth while still working?, Does it make sense to convert to Roth while still employed?, Should I convert my IRA to a Roth IRA while still working?, Should I convert my 401k to a Roth IRA while still working?, Roth conversion from 401k, Roth conversion from IRA, Does it make sense to convert to roth, Roth conversion while still employed, roth conversion while still working

Id: sTY6vCMPDKc

Length: 16min 47sec (1007 seconds)

Published: Mon Jul 10 2023