Let’s talk a little bit about Roth conversions. Oh, wait a minute. Before we do, make sure you like, subscribe, and share this information with your friends and your family. I think they’re going to benefit from this as well. I’ve been fortunate. Many of my new clients come from existing clients.
So turn on your notifications and never miss. something from FinancialProf.org. So Roth conversions, it’s an option. What Roth conversions basically are is you’re taking a before tax vehicle like an IRA and converting it and turning it over to a Roth IRA. Some of the drawbacks 401k,
is an IRA that is before tax. That money that went into there, that money wasn’t taxed. So it’s sitting, growing you know, it’s growing without you having to pay tax on it until you take it out. Some folks will want to convert it to a Roth. The downside is you have to pay the taxes. So for instance, let’s say you had a IRA and had $100,000 in it and you were in the 25 percent tax bracket and you wanted to convert it to a Roth.
You’re going to have about a $25,000 tax bill that you’re going to have to pay on that. The government’s got it all figured out. You know, whether it’s an IRA, 401k, which is kind of the same thing, Roth IRA, government’s got it all figured out. But some people may understand the value depending on their age, to convert it.
Part of the conversation about the delaying tax is that when you’re older you’re going to pay less tax. I don’t know if anybody listening to this believes that. If I were to ask you in the next 10, 15, 20-30 years, are taxes going to go up or are they going to go down? I would say probably 99 out of 100 of you would say taxes are going to go up.
So you are delaying paying tax paying a larger tax exposure, larger tax bill by letting that money grow. So everything that you potentially grew could get eaten up in taxes. That’s why as a sidebar, if you are investing in a 401k. And they give you a matching, at least take advantage of the matching.
I would advise you maybe not want to put any more into that, but at least take care of that because it’s kind of quote unquote free money. That basically would be dollars that would pay those taxes when you were to take it out. So just something to consider, and plus you have all the, you have all the government regulations, you can’t really touch it till 59 and a half.
You got to start taking it at 70 and a half. Some IRAs have gotten a little bit more liberal that if there’s a family emergency, maybe a 1st time mortgage. Something like that, that you can take out that 401k, still got to pay the tax, but you’re not going to be penalized because if you take it out before 59 and a half, you got a 10 percent penalty.
Plus you got to pay the tax. So there’s a lot of stipulations and the 70 and a half. You may not want to take it out, but you have to take it out. If you don’t take out your RMD, your Required Minimum Distributions, they’re going to tax you 50 percent on that. So you got to take it out. So some people say, Hey, let me convert it to the Roth.
Let me bite the bullet. pay the tax, and now it’s going to accumulate and grow tax free. Again, there’s stipulations on it because you really can’t touch that money at least for five years once you put it in that Roth. So you got to do some math. If you take it out before the five years, you’re going to pay tax on that.
So again, government’s got their little fingers involved in anything that has to do with a Roth, 401k. As a matter of fact, Roth came from a senator or a politician who kind of introduced this. , Roth is the name of a person who introduced this.
And it got approved as an alternative way to grow retirement savings. So now the other part of a Roth is you got to put it into something. All right. And you can put it into anything. Anything can be, you can use as a Roth. But whatever it is, you got to make sure and, you certainly don’t want to lose any money.
So whether it’s in a stock or a fund, or you put it in a real estate, or you put it in gold, or you put it in crypto, you know, you are subject to the market. Whatever you had that money in, regardless of whether it’s a Roth or a 401k and it lost value. Your account is going to lose value.
And a lot of folks, they go get in their retirement and, you know, they guessed wrong and the market dropped and it took a pretty big chunk and they say, well, that’s just on paper and now it’s not on paper. That’s real money. Lose $20,000, $50,000, a $100,000 dollars on paper. That’s real money. You don’t have it anymore.
So is there an advantage to it? Depends on your situation. You know, there’s not a cookie cutter, right way to do it. It depends on your situation. But things to be aware of that if you do convert, you’re going to pay all the tax in that particular year. So if you converted it in 2023, you’re going to owe tax on that in 2023.
You’ve got to sit on it for five years before you start to take any withdrawals, or you’re going to pay tax on that. Now, one of the tools I like. And I’m just going to kind of throw it out there are FIAs. So these are particular products that again, don’t have the government intervention.
It’s not subject to any kind of market loss. The worst you’re going to do is zero and they grow tax free. So if any of this was a value to you and you want to know a little bit more about FIAs, just reach out to me at FinancialProf.org and we’ll help you out. So until next time, make it a great day.
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