Advanced Roth Strategies

Knowing some of the more sophisticated strategies for Roth iras can help you build your tax free bucket even faster

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https://calendly.com/stevewershing/inquiry

Transcript below:

Speaker 1 (00:07):

Welcome back to 30 Minute Money, the podcast delivering action-oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald here at Roc Vox Recording and Production, and Steve Wershing from Focused Wealth Advisors. Speaker 2 (00:19):

Hey Scott, how are you doing? I'm well. How are you? We're Speaker 1 (00:21):

Going to talk about your favorite thing. Buckets. Speaker 2 (00:24):

Buckets, more buckets. We're bucket. We're going to talk about the tax free bucket. Tax Speaker 1 (00:29):

Free. That's my favorite bucket. Speaker 2 (00:31):

We're going to talk, it's my favorite bucket too, and we're going to talk about Roth strategies. We're going to talk about some advanced strategies today about Oh, Speaker 1 (00:37):

Advanced. Speaker 2 (00:38):

Exactly. I mean, everybody knows about contributing to a Roth. Everybody knows about Roth conversions, but we're going to talk about some advanced strategies today. So Speaker 1 (00:47):

Cool. I'm excited about that. I'm a little bit remedial mostly, so I'll see if I can keep up the advanced Speaker 2 (00:51):

Class. Well, there's at least one or two of these that may be good for you. I have flag 'em on my notes here so we can talk about those. Now. First, let's just real brief review. Why do we want to worry about Roth IRAs in the first place? We want to worry about it because income that comes out of a Roth after you've had it for about five years is free from income tax. That will help you avoid taxation on your social security. And here's one that a lot of people may not realize or that they may forget, is that it's not just about you, but when you leave a Roth I r a, when someone inherits a Roth I r a, they get to take it out tax-free as well. And that's important because let's think about sort of like the standard normal case. You have a productive life, you live into ripe old age and you pass away and there's still some money in your retirement accounts and you leave it to your kids. How old are your kids at that point? Speaker 1 (01:51):

Are you asking me how old my kids Speaker 2 (01:53):

Will be? Guess not your kids. If you live to an average life expectancy and you leave some money to your kids, so they're Speaker 1 (02:00):

Going to be what, in their sixties? Speaker 2 (02:01):

Yeah, fifties, maybe the late forties, fifties, early sixties, right? Peak earning years. The last thing you need to do is to add taxable income to their situation because they're probably making as much as they ever will. Gee, Speaker 1 (02:15):

Thanks dad. Speaker 2 (02:17):

Exactly. And the problem now after the secure act in 2019, you can no longer, it used to be that if you inherited an I R A from a non-spouse, you could just stretch those payments over the rest of your life. Can't do that anymore. Most people who inherit an I R A from a non-spouse has to take it out within 10 years. So if you are 55 and you're making money like crazy and somebody leaves, you make the math easy, somebody leaves you a million dollar i r a, good for you, you get an extra million dollars. You're also going to have a hundred thousand dollars more in taxable income per year for the next 10 years, and that's probably going to push you up a bracket or two or three. (03:04):

So there are great benefits for you to have a Roth I r A. There are also great benefits to your beneficiaries for having a Roth I r a. So I just wanted to make sure that we didn't, even if you're not that concerned about your own taxes in retirement, think about what happens after that because it's important to them too. So we'll talk about a few ways that you can make even more use of Roth IRAs than you might even have thought. And so the first one is how you get money into it in the first place if you are aggressively trying to save for retirement, if the kids are out of school and you're really focused on retirement, you're putting away as much money as you can if you're contributing money to Roth IRAs. So again, you can put money into a Roth, two ways you can contribute or you can convert, you can contribute money. Just take money out of the bank, put it in a Roth, that's a Roth contribution, or you can convert it from another kind of a retirement plan. That's a Roth conversion. There's only so much you're going to be able to accomplish by contributing because the annual contribution limits are pretty low Speaker 1 (04:12):

For Speaker 2 (04:13):

Roths. For Roths, yeah. Roth IRAs, traditional IRAs, we're talking like $7,000 if you're over 50 give or take, there's only so much progress you can make there. The real progress is going to be made into your retirement plan at work probably because you can put tens of thousands of dollars into a 4 0 1 K for

example, and two ways that you can use that to your advantage with a Roth. One is more and more 4 0 1 Ks have Roth options, and in the next couple of years, I think pretty much all 4 0 1 Ks will have Roth options. And so you can crank money into a Roth 4 0 1 K as opposed to a Roth I R a and really start building up that tax-free bucket aggressively. Speaker 1 (05:02):

It seems like it's the best of both worlds. Speaker 2 (05:05):

The Speaker 1 (05:06):

Roth 4 0 1 Speaker 2 (05:06):

K, I mean it's good. It's, it's not the best because you have to pay tax on it that year, but it's a way of getting more into the Roth environment than you could into the Roth I R A. If your company plan does not have a Roth option, you may be able to make after tax contributions, which is essentially the same kind of thing, but it may be labeled differently in your plan. So take a look at some kind of way to put money other than pretax into a retirement plan. It's the 4 0 1 K where you can really make some progress there. You can put in way more than you can put into IRAs. (05:46):

The next strategy that you can use to get money to a Roth IRA is what we call tactical conversion. So you can convert money from a traditional I R A to a Roth I R A in whatever amount you want in any year. It's just taxable. When we say tactical, what we mean is that you're going to maximize your tax bracket. So we get toward the end of the year, so we meet our clients twice a year in the spring and the fall, the spring meeting is about portfolio estate beneficiary update, that kind of stuff. And the fall meeting is usually oriented a lot around taxes because it's late enough in the year that we can get a pretty good idea what's going to happen, what that 10 40 is going to look like, but we still have a couple of months where we can do something about it. (06:33):

And so one of those things that we might do is to convert IRAs into Roth IRAs. And what we would do is, excuse me, build a hypothetical tax return based on what we think is going to happen. And we will take a look at where they are in their tax bracket and if there's a fair amount of room between where they are, where they're likely to end up, and the top of a relatively low tax bracket, the top of a 1222, even a 24% tax bracket, that tells us how much we can convert at a low tax rate. So we might convert to the top of the 12%, we might convert to the top of the 22% bracket because in 2026, those are going away. They're going to be replaced by the 15 and 25% brackets. So if we can convert money in a 22% bracket, great, we might do that. (07:25):

We're going to pay some money for it now. But that means that later when you go to pull it out, that money on all the money that it earns from here to there is tax free. And so maximizing that bracket every year, something we routinely do with clients, we call those tactical conversions. Let's take a look at where you are. Take a look at the top of the bracket, figure out how much of that bracket we want to

fill up with a Roth conversion. Here's a really interesting one that I learned at an educational conference last week that I hadn't really thought about before. You can keep converting even into your seventies when you're forced to take required minimum distributions. And this is the case with quite a few of my older clients. They may get a pension, they get social security, they live a fairly frugal lifestyle. (08:16):

They don't really need very much out of their retirement plan, but once they hit that golden age, the I r S says there's a minimum you have to take out. We don't care how much you take out. It just can't be any less than this required minimum distribution. Well, if they don't need it, if they're not going to spend it, one thing that you can do is take the R M D, pay the tax on it and use whatever money you have left to pay tax on a Roth conversion. So let's say your required minimum is $10,000 this year, you're going to take $10,000 out. You're going to take out 15 20% for taxes. That leaves you $8,000. Let's figure out how much we can convert from your I R A to your Roth I r a to add up to an $8,000 tax bill. (09:05):

If you don't need the amount that the IRA is forcing you to take out, then use it to pay tax on a conversion so that you can convert as much as possible. That means your required minimum next year is going to be lower because you have less in the deferred environment and net you're not really out any money. The I R S was going to force you to take it out anyway. If you don't need it to pay bills. If you don't need it for some project that you wanted to do, well, you can utilize it to pay tax on a conversion. And if you do that systematically for a few years, you can probably work down your required minimums by draining the principal out of the traditional I R A and building up your Roth I r a to the point where the taxes are a lot less on it. (09:52):

Here's a special one, and this is the one for you, Scott. If you run a business and you have a year where you're going to show a loss in your business every year, I'm just kidding, go ahead. That can only go on so far. That's a self-limiting strategy. But let's say like a couple years ago, I made a conscious choice to invest an absurd amount of money in marketing my business to the point where I showed a loss for the year, and that was a calculated decision. I knew what I was doing, but it created net losses for me for that year. So how do you use those losses? Well, one way that you can utilize a business loss like that is to offset the tax on a Roth conversion. So you can use business losses to offset as much as 80% of the tax on a Roth conversion. So if you have a certain amount of business losses this year, you can convert money from your Roth I r a. That would normally be taxable, but a majority of that conversion, that the majority of the tax on that conversion can be paid by your net loss. So you end up zeroing it out on your 10 40 and you can effectively get a free conversion for that year. Speaker 3 (11:15):

Your retirement is at risk, not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner, Steve Waring and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family and keep it away from the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life, how to move savings into a tax-free environment, the Widows Tax, the Secure Act, the Secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more

and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today. Speaker 1 (12:41):

Alright, a lot about a tax-free bucket, our favorite kind of bucket. What's your 30 minute action item? Speaker 2 (12:45):

30 minute item, how much would you like to put in your Roth accounts next year? Get that total and we'll figure out ways that we can get it done. Speaker 1 (12:54):

All right. Thanks for joining us on 30 Minute Money. You can find it on all the platforms, make sure you like and share, and give us a nice rating and a review and follow Steve at Focused Wealth Advisors for the blog and we'll catch you next time. 30 minute money.