I'm 59.5 And Working With $650,000 In My 401(k) Should I Convert To A Roth IRA

you're 59 and a half you're still working and you've built up 650 000 in your 401k the question you are asking now is should I consider converting some of this money to a Roth thanks for joining us that's what we'll be discussing today hello my name is John Vandergriff I am the wealth planning team lead and one of the owners here at Blue Ridge wealth planners where we help people create plans for their retirement to either transition very effectively into those retirement years or if they're already enjoying those retirement years make sure that we plan for the things that help them to enjoy those years for as long as they have left and so one of the topics that is top of mind today for good reason is taxes and tax planning that's going to be the basis of our conversation today and whenever we have these videos I always like to point out two sort of disclaimers and things to be aware of before we get started first we're going to go over a very specific situation uh your situation may be similar to this but make sure that you consult a CPA tax professional Tax Advisor um you know or some type of financial planner that works in taxes before you make decisions just based on this video because again there could be some things about your situation that are individual to you that are not being factored into what we discuss the other is make sure that you like share subscribe the videos that you watch with us that helps us to be able to get this message out to other people but also can get it to where you can get more of this content as we release it so with that being said we're looking at a 59 and a half uh year old working with 650 000 in their 401K question becomes should I convert to a Roth we'll talk about why 59 and a half is such a specific age that the government picks out and how that will affect the different things that you consider here but like we talked about to plan effectively for retirement we have created what we call a plan for everything which is where you really need to plan for five Baseline areas of retirement your income investment strategy taxes health care and then family Legacy the more you go into this conversation the more you start to see these things really overlap and affect each other we're going to focus primarily on income today income in the future and how that affects your taxes but again all these things are going to be you know intermingled and need to fit together and move in the same direction for you to have the most optimal situation you can so so again in this particular scenario what we're looking at is a married couple age 59 and a half and 62 fifty thousand dollars of combined income today uh their total is six hundred and fifty thousand and 401ks and they have you know minor amounts in bank accounts but not enough in there for us to potentially use to pay for the taxes so we're really going to focus in on their 401K today uh they're planning on working another five years uh whenever they do get to retirement they're combining Social Security at that time would be thirty five hundred dollars um or forty two thousand dollars a year their income needed retirement would be four thousand dollars a month or forty eight thousand dollars a year so most of their income will be coming from their social security so not a lot of income need here but again we want to focus on whether getting this money into a more tax strategize or tax-free position in Roth is a good decision for them so so as we look at this the reason 59 and a half is such an important age is that is when the government has decided that once you reach this age you no longer have a penalty uh to access your money in your Roth account or your IRA or 401K so as we look at this it's important to cross that threshold so that we don't have a penalty but also if you do any conversions after the age of 59 and a half as you see here uh your principal will be available to you during the five-year waiting period for your growth to be tax-free so you could access what you convert and then access the growth later because when we look at this things to consider with Roth conversions first moving money out of a 401k or IRA it is a taxable event so whatever money you take out will go on top of in this case the fifty thousand dollars of income that you have Roth IRAs need to be in place for five years before the account is fully accessible for tax-free benefits but like we said if you're over 59 and a half your converted amount would be available to you during that five-year window so if you did a hundred thousand dollars that would be available but if it grew to 110 and you liquidated the account that ten thousand dollars extra would be taxable to you so so again 59 and a half becomes a very important age especially if we need to use some of this money in the conversation for converting these dollars and again just being in a position where they get overall enjoyment um from these monies in a tax-free fashion so as we look at this um this particular situation as we kind of zoom in on our plan for everything here so we know five years from now they'll have social security combined at thirty five hundred dollars a month their annual income need is forty eight thousand dollars a year their wages are 50. so there's no need that they have off of their savings and very little need that they'll have off of those savings uh by percentage whenever they get to their retirement years but today their income is fifty thousand which would translate up here and bring them to their top tax rate of 12 so 12 percent if we did any type of conversions would be the starting place because any money that comes out of an IRA or a 401k is taxed at your top tax rate of income and goes from there depending on how much you convert and then as we said they have 650 000 in 401ks and then a minimal amount let's say ten thousand dollars uh in bank accounts just for liquidity and we always want clients to have at minimum ten thousand dollars for uh access to eliminate need for credit cards and things like that and then currently zero tax-free accounts like Roth positions currently or properly structured life insurance plans so as we look at this um you know we've got to consider uh if 12 as a starting conversion rate is a good thing compared to what those tax rates could be later because you know whenever we walk through this example with people get a little thicker we've got to factor in what we have as income today but also where that income will potentially be later because that will impact whether making a Roth conversion today makes sense or not so as we look at this what we're going to do is illustrate that with a very simple example with round numbers and it's going to look at if we decide to not do conversions versus if we decide to do conversions and what factors impact whether that's a good decision for you or not so if you've got a 401k and you decide to do nothing which a lot of people are not paying attention to this so they're by default in this category nothing changes with your position if you decide to do in this case a hundred thousand dollars of conversion that would go on top of the fifty thousand dollars of taxable income that this particular family has and let's say just for round numbers sake the effective tax rate for this conversion is twenty percent that means they could or in this case they would need to since they don't have a large amount of after tax monies take a withholding from this hundred that's converted for the taxes and then their net amount that is converted would be eighty thousand dollars so again when we look at financial advisors will a lot of times tell you this is a reason not to do a Roth conversion and then there really won't be more discussion because they say well if the market goes up let's say 10 this Count's going to grow faster than this one will and so people don't want to grow slower so they make a decision not to do a Roth even though that's not really the thing that we've got to pay attention to because that growth of 10 000 taxable dollars could be worse or better than the tax free growth here but it depends on what happens later when you take the monies out so for this example let's say both of these monies are invested the same way to where they both double over time and then we've got 160 000 in the Roth we've got 200 000 in the 401K we've got to see what happens if we go to take these monies out later well if we're assuming that this is longer than five years the Roth all that you take out doesn't matter how much will be tax-free so 160 000 to you from the 160 000 account value the 401K it depends on the tax brackets at the time and if the tax rate later is the same 20 percent that we started with and converted at what you will notice is the bottom line number in both of these scenarios is exactly the same 160 of 401k net of taxes 160 of Roth net of taxes so as we look at this if you knew your taxes were not going to change it doesn't matter which decision you make it's just whether you pay the taxes now or you pay them later the reason that most people don't do Roth conversions is based on traditional advice of the fact that most people when they got to their retirement years did not have as much income or maybe didn't need as much income and so that meant that their tax rates typically went down and if that was the case you'll notice the math works out in favor of the 401K even though this account's been growing tax-free so sometimes people here tax-free is always good not necessarily if your taxes are lower later tax-free would cost you money if you made that move today the reason though I don't think that this is going to be relevant for many people is because of what's happening in our government system in the way that it's going to affect your income taxes in the future what we are experiencing now is a time where we are overspending as a government by a pretty large percentage and since we've been doing that for several years that started to accumulate massive amounts of debt uh to the tune where we now owe 30 trillion dollars or over 30 trillion dollars as a government and the government doesn't have money of its own that it just provides a service or makes something and generates it receives income through tax revenue largely so the way to fix this is decreased spending is one option the other option is increase the amount of income and that will happen through increase in taxes so if that is the case and income taxes go up for this particular individual over time to the tune of instead of being 20 let's say 30 percent is the tax bot on these dollars what you will notice is that has a direct impact to what they take home out of this money which means they would have 140 000 instead of 160 and so Roth converting now in this case makes sense because the tax percentage is lower today than it would be at the time that they take the dollars out now what's interesting is sometimes people will look at this and they'll say well yeah this is you're you're having a much higher percentage later because you've got a much higher withdrawal well depending on your mix of income this could be your Baseline starting income uh depending on what the mix of taxable assets are that you have because if you've got social security income which is taxable pension income which is taxable distributions from uh rental properties or dividends and then you take monies out of your IRA or 401K even if you don't need that income you're going to be forced to take it out at some point so this is not a I don't need this money you could give it to charity but other than that you're going to have to pay the tax on it so as we look at this all those different income sources that we have will stack on top of each other and then your first dollar coming out of your 401k will be taxed at that level not your starting level so we've got to look at it and say okay in this particular situation today where will that starting income be at versus where that by percentage versus where that could be later at an equivalent income set so so in 2023 for this couple they just get above the 10 bracket to where that first dollar would technically be taxed at the 12 tax rate uh so 12 would be our starting rate of conversion uh as we look at this I'm going to jump this up and zoom in to where you see 2017 this is actually what the tax brackets will be in 2026 that will revert back to the brackets in 2017 these are adjusted though for inflation to be today's values and you see this would be a 15 start instead of a 12 so you've already got an increase on that fifty thousand dollars just by seeing what happens three years from now and then I'll show this example 1981 nobody's throwing this out as a prediction but this was the last time that we had a significantly higher tax situation especially the higher your income got because these are adjusted for inflation to be today's values so a hundred thousand dollars in today's money was roughly thirty thousand dollars in nineteen eighty one so as we look at this you know top tax bracket today is 37 as you notice here top tax bracket 70 percent so taxes were almost double but if we're looking at where this particular family would start paying taxes it would be at the 21 tax rate go for the next nine thousand dollars of conversion so as we look at this 21 is not quite double uh where they start at today but you know pretty healthy percentage larger as we look at this because they could convert at the 12 percent bracket today if they waited until you know 2017 but really 2026 is when these could go into effect and again could is the way because the government could change taxes before 2026 if they want to um 15 would be their starting rate of conversion and then the starting distribution tax if things got to 1981 would be 21 I think that for this particular scenario what you're looking at is a starting tax rate between this 15 and 21 because there's not going to be enough of an increase to fix all the overspending that's happening I think you're going to start to see drastically higher especially higher the people's income goes the more impactful this starting tax rate is going to be on those 401K monies so in this particular situation how much should we convert well again if we're looking at a 15 tax rate what's interesting is and again this helps you understand the way money is taxed so again this family was barely in the 12 percent tax bracket so if they maximize the rest of that 12 tax bracket they could convert 67 000 and change of dollars out of that 401k and then if they were trying to play this to where their effective rate of conversion would be less than 15 percent you just start doing the math and see how much makes sense to convert it 22 percent to where your effective tax rate is lower than what that 15 would be later so 25 000 is roughly where that would be so 92 000 150 of conversion is what we're looking at here with an effective tax rate of 14.7 percent or less than 15 percent and again that gets that money to where of the 650 000 that's in 401ks now they're migrating and moving 92 000 over uh less the taxes uh and then that would give them a good start to attach per every bucket and not having to wait to access those since this particular couple is at age 59 and a half so as we look at this this seems like a lot I know it does but if no one has ever had this type of conversation with you you probably don't have a tax plan and you probably want to investigate this to see if now is a time for you to pay taxes instead of missing an opportunity to maybe have the lowest tax percentages that you'll see the rest of your life so what I would invite you to do you're going to see a link pop up what I'd ask you to do is click that that will get you in touch to our calendar where you can sit down and talk to one of our wealth planners and again see if this type of information makes sense for you because again we're talking to people all the time sometimes this doesn't make sense to do now sometimes it does and then we help them walk through that process of what to do how much to do and where to potentially pay for those taxes so we would enjoy having that conversation with you seeing how we can help if you would like to help us please like share and subscribe this video leave us any comments that you have we'll be happy to reply to those but also

Channel: Blue Ridge Wealth Planners

Views: 40,819

Keywords: retirement planning, retirement, income planning, investment planning, financial advisor, retirement income, Roth IRA, IRA, Tax Planning, Tax, 401k, wealth planner, wealth planning

Id: cofb-q_xjF4

Length: 17min 52sec (1072 seconds)

Published: Wed Feb 08 2023