I'm 68 And Retired With $200,000 In My 401(k) Should I Convert To A Roth IRA

you're 68 years old and retired with 200 000 in your 401k and you're asking yourself the question should I consider doing a Roth conversion that's what we're going to discuss in our video today thanks for joining us my name is John Vandergriff I am one of the owners and the wealth planning team lead here at Blue Ridge wealth planners where we help people transition effectively into retirement from the workforce but also if they're in retirement make sure that they have the plans that they need to enjoy that retirement for as long as they're here and as comfortable as they can enjoy it so uh in that conversation is going to be looking at several factors but one of which that we're going to focus in on today is taxes and tax planning which is where we revolve around this conversation with a Roth account and converting monies from a 401k into a Roth position so a couple things we always start our videos with um you know if you like this content I want to share it with other people we would encourage you to do that like our Channel subscribe to it and you'll be able to get content just like this that we'll be coming out with um and make sure that you comment with any questions that you have we'd be happy to hear feedback from you um and then the second thing is uh we're gonna go over some details today and really dig in a little bit deeper into some things with Social Security but make sure that you are taking uh your specific information and Consulting with the tax professional that you work with before you make any recommendations off of this information we're going to cover because this is a very specific situation just like yours is you need to make sure that you have all the information on the table before you make these moves you know for us we work hand in hand with our clients professionals to make sure that we have all the information before we do any kind of recommendations in this category so 68 years old they've got 200 000 in 401K retired should they convert to a Roth obviously there are a lot of factors to consider in this decision and so um you know as we look at this there are several factors that we talk to people about when we're creating a full-on retirement plan obviously taxes and really income are going to be where we focus today but obviously we've got to have some answers to how we invest software Health Care Family Legacy strategies all these things need to be resolved and talked about together because they will impact one another you know all five of these areas taxes is going to be a stream that runs through all of them and so we want to make sure that we are considering all the factors before we make certain decisions so to dig in a little deeper to this so this is a single person 68 years old uh two hundred thousand dollars in their 401K a hundred thousand dollars between different bank and after tax positions and what they have at retirement uh income of twenty two hundred dollars a month from Social Security no other income sources and so with their income need being at 14 or 42 000 they need roughly fifteen thousand dollars year that they can pull off of their retirement picture here so as we look at this more and more people are coming to retirement with just Social Security as an income source that they have outside of their savings and whenever we've got Social Security as the only income source and potentially a small need or a small mandatory distribution that you would have on the 401ks if if not before by the age of 73 now we want to make sure that we understand taking money out of 401ks and what it could do to the taxation on social security benefit so most people don't know that Social Security is taxable it is that started in the 80s it hasn't always been that way which is why there's some misunderstandings here but when we calculate Social Security taxes the things that we have to know is we have to take half of your social security benefit in this equation and then any other income taxable amount and add those things to get other to determine how much tax you're going to owe on that social security benefit or how much of it will show up as a taxable amount so as we look at this this is a chart for a single person which is the situation we're looking at there is a chart for married people but if this combination turns out to be less than twenty five thousand dollars you actually don't pay tax on social security so depending on how this situation would fund its lifestyle it is possible for them to get to less than uh twenty five thousand dollars because you know if they pulled from bank accounts didn't touch their 401K they could show up less than that um but we're going to show you an example here where that probably won't be the case they may need to withdraw from their 401k to meet their lifestyle needs so um so if we add some things together and that number is between twenty five thousand and thirty four thousand fifty percent of your Social Security is taxed and then if you go above thirty four thousand eighty five percent which is the maximum tax or the maximum of your Social Security that will be taxable shows up on your tax form so so again we want to make sure that we understand this and we're going to dig into the specifics of this example in just a second but we've got to know that the decisions that we're making any Roth conversions that we do can have an impact today on how much Social Security tax we pay and we just have to weigh the total picture here to see what gives you the best situation so so as we've zoomed into our plan for everything board here uh focusing on the income as we said forty two thousand dollars a year is what this particular person needs is 3 500 a month 26 000 of that is provided by Social Security so 15 000 and change is what they need from their savings so as we look at this going over to their annual income need after they satisfy what their lifestyle is they would be in the top bracket of 12 percent as far as their taxable income goes if they pulled it all from taxable sources pre-tax monies as we said 200 000 after tax 100 and then no current tax-free accounts with either Roth positions or properly structured life insurance which offer tax-free benefits so so as we look at this again with Roth conversions any money that we move out is going to make that situation more taxable you know just depending on how much it goes through the brackets but also how that mixes together with social security so we'll look at that in just a second but again big picture things that we need to consider with a Roth IRA the Roth needs to be open and in place for five years before you have completely tax-free distributions on that original amount and then if you're over 59 and a half during that five years the principle that you convert is available to you for that five-year period but any growth would be taxable so we need to understand that um you know so we don't over contribute into this and maybe think the entire thing's taxable and then we find out that's not the case so so as we look at this example for Social Security I wanted to do these as kind of a side-by-side comparison just so that you can see the difference here because like we said the equation here is half of your social security benefit and then any other income taxable source so as we said half of their social security is 32 or 13 200 the income that they would need and we're assuming that they pull it from their 401K that way it does show up taxable I would be 15 600 so if that was to together twenty eight thousand eight hundred would be their income for this equation and because it made Social Security fifty percent taxable that also is their taxable income for that particular year so as we said if Social Security was fully taxable their income tax would be forty two thousand but because they didn't go outside of the fifty percent threshold they're paying only fifty percent tax on social security their taxable income is just under thirty thousand dollars so as we look at this let's say we do a small Roth conversion and we just add it to this picture here of five thousand dollars you notice that those add together and get to thirty three thousand eight hundred which is at the very top of that fifty percent uh bracket if they went into the next one then it would cause this uh Social Security amount to jump up to 85 percent taxable that would increase their taxable income but this is kind of getting to the very end of where they're taxable income would be in that 50 percent bracket for their social security so as we look at it in this particular situation if we wanted to keep Social Security taxed the same way for round numbers sake you could do about a five thousand dollar conversion but if you didn't want to mess up your current Social Security situation that may be kind of the limit especially if you're not sure about interest payments or bank interest things like that that would probably be the top of that recommendation so so if we did six thousand of a conversion we jumped into 34 then that would make as we said 85 percent taxable on Social Security and then your overall taxable income would show up a lot higher so so we want to look at that and then factor in you know as we look at these situations um we noticed that both if we take our income from the 401K um we're in a position where our top tax rate for conversion would be 10 percent or really going into the 12 bracket we would exceed 10. so we would have 12 percent that would be owed on any converted dollar so if we did the five thousand dollar conversion it would be at 12 percent but we have to compare that to where those brackets could be later so so 2017 the reason that I bring this up is that is also if no changes are made where the tax code will revert back to in the year 2026 and if that's the case what is now the 12 bracket would become the 50 18 bracket which would make any monies coming out of the 401K more taxable which again is what we don't want we want to try to have the most efficient picture and again as we look at this um you know the the particular example here is taking out at a mix of 10 and 12 percent and even if they get to a point where they're taking that income out from another place by the time they reach their required minimum distribution age of 73 they're going to be forced to take out roughly four percent of whatever that account is worth at that particular time and pay taxes on it at that rate and so you know as we look at it it's going to be a situation where depending on how long this particular person lives they may actually be forced to take out more than their lifestyle needs necessitate from their 401k and be forced to pay if taxes go to this example at 15 percent and then the reason I bring up this last one uh 1981 is the last time that tax brackets were significantly higher as we look at the top tax bracket here was 70 percent compared to the top tax bracket today which is 37. uh so as we look at this the reason we wanted to bring this up is in this particular situation and again depending on which level we went to you would be at either a top bracket of 19 or with the you know 5000 conversion added in you would go into 21 which is noticeably higher uh not quite double where those brackets are today but by percentage a substantially higher percentage going to the government of this income than it would be today so so as we look at this when we have to consider Roth conversions we do want to make sure that we understand uh what really we've got to measure in this particular example and there are some factors that we do not know so in this we do not know where taxes will be for sure in the future but we've got some opinions that I believe taxes will probably increase over time and so if that is the case then we've got to look at the example of does a movement of money from the 401K to an account like a Roth IRA makes sense today or should we not do it at all so that's what we're going to look at with a very simple example here so let's say round number sake you get a hundred thousand dollars that you're looking to convert what we've got to examine is what will the taxes be on that hundred thousand if we leave it alone and pay it later versus what would those taxes be if we made that conversion so again as we leave it in the 401K no taxes are owed now so it stays at a hundred thousand dollar account balance uh the Roth obviously depends on the tax bracket at that particular time but if we just round it off at 20 percent and we pay those taxes out of this hundred which makes it a fair comparison point then eighty thousand dollars what we start the Roth with 100 000 and so most advisors that you talk to when you bring up the topic of Roth conversions they may show you an example like this and stop right here and say this is why this is not a good decision for you because in this scenario you've got a hundred thousand in this scenario you've got 80 if the market goes up you're going to make more money over here than you will in the 80 000 Roth account which from a numbers and a math standpoint is true you know ten percent of this is ten thousand ten percent of this is eight but we're not looking at even buckets of money because this one is a fully taxable 10 versus a tax-free eight as long as it's in place for five years so as we look at this we've got to continue the example and again keeping all the factors equal from a growth perspective time perspective that way we take care of inflation time value money all those things uh that people try to throw into this equation is reasons not to do it again I look at this and we've got to make sure that we are evaluating the right factors and the decision-making process so let's assume they both invest in the same thing both of those things double in value that means the 401K is now worth 200 the Roth is worth 160 and now we're in a point where we need to draw this money out in some capacity uh in this example we're just going to look at it as if it's done in a lump sum so as we look at this if we pull from the Roth account you've got 160 000 that would be owed or not owed but available because the Roth has grown tax-free this whole time the 401K it depends on what the balance is um and what your income is at the time and what tax brackets are and how this affects that so if we've got 20 percent that's out there what you will notice is that in both of these situations the bottom line number is exactly the same so as we look at this 160 if you had it in the 401K 160 if you had the Roth doesn't matter if it grew taxable or tax free if the tax brackets are the same you get the same end result now the reason that people will typically recommend not doing Roth positions is they have a strong opinion that they feel taxes will not be higher later for you they will be lower you know again the Traditional School thought is oh I'm going to have less income in retirement that more income so let's defer all my taxes to when it's less because less income would translate to less taxes the problem is no one has ever promised you that but if that assumption was correct and you went down to a 10 bracket you would actually have more money in the bucket that was growing fully taxable than you would in the Roth account that's been growing tax-free the entire time because the exit Point bracket is lower than the entry point bracket up here so again it matters when can I pay the lowest percentage of tax now again based on what's happening today we've got to throw some current events into here to show what in a lot of the cases that we talked to I think is a more realistic picture I think taxes have a strong chance of going up because of the overspending in Washington the huge amount of debt that our government is carrying that's going to translate to at some point a tax increase that we are going to feel especially if we have money that's still income taxable in the way that it grows and the way that it's withdrawn and so as we look at this 401K it is 100 exposed to legislation that would increase taxes and if that were to happen and our taxes went from 20 to 30 percent well that means this 200 000 loses 30 percent of its value when it comes out to the tune where you've now got 140 000 versus 160 in the Roth because you already paid the tax man when you entered this account so as we look at this the whole game that we're trying to figure out without the end pieces which makes this a little bit more of a challenge is when can you individually pay the least amount of taxes that's what we're after and so as we look at this we've got to weigh into some different things to consider because um you know as we look at this starting distribution today as we said would be 12 percent on any conversions that happen as we look in the future it would be at 15 percent if we went back to the 2017 but as we said is really the 2026 tax brackets so again they refer back to the 2017 code and then 1981 if that were to repeat itself would be 19 but I think reality is probably somewhere between these two you know if taxes need to go up to take care of the huge amount of debts again it's not just going to be little increases it's going to be larger increases and typically those larger increases will get bigger the higher of the income tax brackets you go so so as we look at this particular situation we don't want to go crazy aggressive for a very long period of time because we don't have a huge amount of money in the 401K but also we don't want to just completely jack up their social security for no reason and so as we look at this though 12 percent I feel like historically is a pretty low tax bracket to pay on especially if we get into a picture of higher taxes later when the client or the example here is forced to take out money for the rest of their life if they do a really good job investing in their 401K they will be in a position where they probably have a higher overall tax on that money than 12 percent so for this particular situation he has a little over twenty thousand dollars of clearance to stay in the 12 bracket I would probably recommend doing that based on the factors that we look at that would you know lower his 401k taxable balance by a little over 10 percent and give him more money that's now growing tax-free and also gives him some tax diversification because now he would have money in all three of those buckets especially if he repeated this process while we continue to have 12 percent as his top tax bracket so so as we look at this sometimes with Roth conversions even if we do a little bit sometimes that little bit can be a very important little bit because now we start to get some different tax benefits from this money than we would if we just left it alone and hope for the best so so as we look at this this could be the recommendation for what we're looking at it does have some drawbacks because it would make Social Security taxable for any of the years that we went as we said in that example over that five thousand dollars of uh conversion but we've got to weigh this compared to where we think things will be later and make the best decision that we can so if you've not been able to benefit from a conversation like this we would be happy to share this with information with you based on your individual situation these aren't cookie cutter recommendations you're going to see a link where you can click to set an appointment with somebody on our team where we can look at your situation see where we you know think your income needs to be in the future to accomplish the things you're wanting to do in retirement and also what type of strategies or movements make sense as a result of that because again the opportunity that we have today may not be around for very long as I said if things progress the way we think it will expire after 2025 obviously they can continue that or cancel it earlier so we've got to make the best decisions that we can with the opportunities we have today and not wish that we had some opportunities later because nobody wants to have regret when it comes to tax decisions so make sure that you take advantage of that we're happy to talk to you see how we can help again I hope you enjoyed the information we talked about today if you would share this with someone else like or comment uh to this video and let us know um you know what feedback you have and we'd be happy to interact with you there um but that's all we have for today check back with us and more of our content and we look forward to helping you hopefully make some good tax decisions in the future

Channel: Blue Ridge Wealth Planners

Views: 7,552

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

Id: bi-tov--Zt8

Length: 21min 23sec (1283 seconds)

Published: Wed Feb 22 2023