Roth Conversion Planning in Retirement: Taxes, RMDs, and Legacy

Roth conversions can provide meaningful tax-planning flexibility, but they are not automatically appropriate for every investor. The decision depends on current income, expected future tax rates, required minimum distributions, Medicare considerations, retirement cash flow, and the intended use of inherited assets. 

Derek Gabrielsen, CRPC® — Senior Wealth Advisor, and Tony Zabiegala, CRPC® — Senior Wealth Advisor, examine the growing role of Roth accounts in retirement planning. Their conversation covers the potential conversion window after leaving the workforce, Roth and traditional workplace contributions, required distributions, catch-up contribution provisions, unused 529 assets, and the differences between leaving heirs a traditional retirement account and a Roth account. 

The episode emphasizes that Roth planning should be coordinated with an investor’s broader tax, income, and estate strategy. The goal is not simply to move more money into a Roth. It is to determine when paying taxes today may create a better long-term result.

Transcript

SPEAKER_02 0:02

Roth IRAs are having a moment. And if you're not paying attention, you could be missing one of the most valuable windows in your entire financial life. Here's what's happening and why it matters. Are those hands still diamond? Oh yeah. Yeah. Yeah. My soul is still a tiger. Excellent. What do they call that? My uh spirit animal.

SPEAKER_01 0:35

Oh yeah. Nice. Yeah. All right. Alright, well, uh talking Roth conversions today and uh some you know tax planning um opportunities. You know, and I I was thinking about it. I I I think we're probably in the best tax uh situation that that we've seen in in our entire career. So especially with uh some of the recent legislation, uh really creating some opportunities uh for people to save. So, you know, we'll we'll get into that. And you know, Roth conversions are all over the internet and uh Roth uh contributions. So so yeah, we'll get into all that and if it's right for you. All right, cool. So um, so yeah, um you know what what is actually driving the Roth revolution? Um, you know, I'd say uh, you know, really the the uh availability of Roth uh accounts inside your 401k or Roth 401ks, yeah, is has really been a uh you know something we did not see even 10 years ago at this level.

SPEAKER_02 1:38

The the Secure Act 2.0 and also the the one big beautiful bill has really I mean man, they I don't know how they come up with the time to find all these stupid little nuance rules. Yep. But and that's our that's on us. That's on me and Derek as you know advisors to like know these little nuances. But um, yeah, you know, they're they're opening up the Roth. But even on the Roth side, the great thing is is like if you're if you're making contributions to the Roth um and you're getting a match, now those matches go into the Roth. So like that's a you know a very big powerful forward uh moment, right? So that's nice. Um here's the other thing. So like the another reason that you know the Roth revolutions here is that let's face it, man, we um we uh you know we're facing historic debt levels. Um and that's the what's the what's the only way you're gonna do this, right? Is probably increase taxes. You know, we can only stimulate the the the growth around us, but we're still got all of this, you know, all this debt, and it continues to compile on itself. Um and and the other part of the equation is is that we are in the lowest tax bracket since like World War One, World War II, like that era, like almost 80 years ago. So that is that is one of the biggest that's one of the biggest items for the Roth conversion. And I think it's you know, I I think another part is is that there's a mentality that, hey, this, you know, Roth IRA is for younger people. I'm retired or I'm about to retire. No, it's not, right? Um you you you're if by creating a a Roth IRA, you know, you're creating another retirement bucket. You know, we can save our money in cash, it's taxed a certain way. Save it in a traditional, it's tax deferred. Well, you know, the the Roth IRA is tax-free. So if we can get a dynamic, dynamic bucket of places to withdraw money in retirement, it can actually help us with you know taxes down the road because Irma's involved, that's for your Medicare, and then the taxation of your Social Security. These are all big these are all big things, right?

SPEAKER_01 3:52

Yeah, and last thing I'll say before we move on. Um, opportunity is also at an all-time high. So um, you know, Roth conversion strategies work great when you have a nice uh non-qualified, non-taxable account you can pull early income from. Maybe if you retire in your early 60s, um, and you can do big chunks uh of Roth conversions all the way up to to 73 because you don't really need that income from your IRA um early in retirement because you have have other sources for it. So just uh uh all-time high uh opportunity uh as well. Yep.

SPEAKER_02 4:25

Um you know the the the biggest part here though is we're we're not we're not pressured to do the Roths immediately, right? Because it like the the big thing of you know over a year ago was hey, if if the you know tax if Trump's first tax laws sunseted, we'd be going back to the you know Obama era tax rate. There'd be we'd all be paying more taxes. We talked about that for two years. Right, right. So that didn't happen. So it's preserved these low interest or these low tax rates for us. Um so and they're permanently written. Like there'd have to be a law written to change them. Yep. So that's a good thing. Um one of the other things is that you know the state tax change, you know, uh just larger is larger estates, right? So we're we're not gonna get hit with too much of the estate planning uh or the the federal estate tax. Um and then also another thing that they that we did through the the one big beautiful bill was for the next few years uh through 2008, uh seniors get a an additional six thousand dollars of deductibility, uh you know, standard deduction. So there's there's definitely um what I'll call there's some stipulations to that to get over sixty-five and make under a certain amount to do all of that. Uh, but uh, you know, as soon as we found that out, I know I was you know making phone calls saying, hey, you know, between you and your spouse, or you know, over sixty five, like, hey, you get twelve thousand bucks. Right. You know, so one of two things is gonna happen. You're you're either gonna realize, you know, fifteen to two thousand dollars as a form of you know, like a tax return, essentially, or we can pretend it didn't ever happen and convert twelve thousand dollars into a Roth. Yep. So those are those are some of the things that that happened and that are still viable for for most people right now.

SPEAKER_01 6:20

Yep. Um, and that goes through 2028 tax year as well, that additional uh 6,000 uh deduction. Uh, we also got an additional or um an increase in the salt uh deductibility. Um it was 10 grand there for a while and it went all the way up to 40 grand, so you can deduct your you know state and local taxes um to at a higher amount. So that was a big windfall for a lot of people. Um and something that people were complaining about quite a bit from the the first Trump tax cuts. Right.

SPEAKER_02 6:51

Um, you know, the catch-up, you know, uh the mandatory catch-up. So like now, if you're you know, there's a lot again, there's so many little nuance rules, but you you can you can you know if you're doing a catch-up, so you're over the age of 50, depending on how much money you're making, they're going to force you to the catch-up needs to go into a Roth IRA. Right. So that helps you because now it's creating that new bucket to you know, tax-free uh growth on an account. Uh but it helps the government because then you don't get the deduction. They want they want to keep that money, right?

SPEAKER_01 7:24

Um that forces long-term savings, so that's a good thing.

SPEAKER_02 7:27

Yeah, absolutely. Um and then, you know, the the the core argument just hasn't really changed, right? It's we're you're gonna they're the government wants their money back, right? And they're gonna force you to take it out through RMDs. So um if we can limit the amount of money, because I have some clients that have they they're they have to take the RMDs and like Tony, I don't need to take all this money. It's like messing up my taxes, and you know, it's putting me into different situations where I gotta, you know, obviously pay more in taxes, but it messes up maybe Social Security or Irma and things like that. So with it with the proper game plan, uh and and knowing that, hey, taxes are on sale, and I'm trying I I have a forward-looking uh a macro view on taxes, you know, doing a conversion can be very fruitful. You're just prepaying the tax now, um you know, on an account that might be lower than it would be in the future. Yeah right. So um all right. So uh some some I guess some of the new you know new rules uh for most workers is you know, again, we talked about the match.

SPEAKER_01 8:34

Um yeah, matching into a Roth is is a big deal. You know, that's that's a that's a that's a great savings tool because um you know the three or four percent that that's your company's matching, um, putting that into the Roth account where it's gonna grow tax-free, um, versus you know, the um the traditional IRA, which is gonna grow and grow and grow, and then you might have RMD problems down the road. So that's a real nice um thing that they've added there.

SPEAKER_02 9:02

So the one thing I will I'll comment on though is you know, do I do a Roth or a traditional and by 401k because I'm still working? And and I and I I feel like this is it is somewhat situational because if you are a high income earner and you're in some of the highest tax brackets, what I tend to see is that while you're earning all this money, you're saving, you're paying down debt, and when you enter retirement, you might actually be in a lower tax bracket. So I don't want everyone to just switch from traditional to Roth. Yes. Uh, I think you should have a conversation, take a look at um with your advisor, have the have the foresight saying, hey, I get to save my money at 32%, but I know based on the next 10 years of paying this off and my you know how my cash flow is going to change in retirement, I might actually be in the 12 or 22 percent bracket. So why don't why wouldn't we save it at 32 and spend it at you know and take it out at 22 or convert it at 22? Yeah, there's a big delta there on 10%, right? Absolutely. So I that's the one thing I just want to say is like don't run out and just change everything to a Roth.

SPEAKER_01 10:09

Yeah, that's an excellent point.

SPEAKER_02 10:10

So um, no, you know, no RMDs on on a Roth 401k, right? Well, you know, I I would hope that you know this just enforces the rule of if you leave your job or you retire, like move your money. Like I we use the old example of like, hey, how many of us have moved from place to place, house to house? Well, practically everybody. Did you leave your furniture at the old place? No, you took it with you, right? So it enforces rollover because the rules are very straightforward. There are no RMDs for a Roth IRA. So get it into a IRA or you don't have to worry about that. They they took care of that, but it just enforces like, hey, there's even though it's a 401k, there's tax deferble, there's different, there's still different things going on, right? Between all the different types of ways and and places you have to save your money.

SPEAKER_01 10:59

Yep. Uh, you know, new catch-up rules we we touched on it last segment, but uh this again, this is something I don't know how they came up with this either. Like but basically between age 60 and 63, you get a super catch-up. So not just a regular, but a super catch-up. Um and that's what um an additional uh 11,250. So meaning uh basically if you're in the super catch up age range of 60 to 63, you can contribute uh 35,750 into a 401k in 2026.

SPEAKER_02 11:36

So yeah, if you're making straight contributions to an IRA, um it would be you know the the it's 7600. If you're under 50, then you get the extra thousand, right? But if you're in this special range of sixty to sixty-three, you can save more than eighty six hundred bucks. So you can save 11, like Derek said, 11,250. So it's like almost three thousand, twenty five hundred dollars more. Same thing with the 401k, it's thirty thirty-two thousand five hundred. Well, they're gonna allow you to save thirty-five, seven fifty, like it's three thousand roughly three thousand dollars more. So how you just have to be in this certain range, you need to be able to save the money. So those are the things that again, we're 60, 63, and it's like you gotta be like if you're like 63, about to turn 64 at the end of the year, you don't count because now you're 64 the calendar year. It's nuts. Um another thing is is that you know, if you're a grandparent, um if you're a grandparent and you want to save into a 529 plan or even a parent, right? Um if you don't use all the money inside of a 529, it it gives the um the recipient, the per you know, the the the beneficiary of that five twenty-nine to the opportunity to take up to thirty-five thousand dollars in their lifetime and convert it to a Roth. Yeah. Um in their name, which is great, right? So you can if I saved it for for my kid, um, I can't make it my Roth. It'd have to be hers, right? For my daughter. So um great rule. There's uh definitely a lot of rules that go into it. It needs to be, you know, not funded for like 15, like it need the money needs to be in, you can't just do it today and convert, you know, make it a Roth tomorrow. And it's like got a 15-year rule and stuff like that. So um, and then the last contributions need to be in there like five years. So there's there's like little stipulations on that.

SPEAKER_01 13:27

It is a great rule though. Um another one um that is actual uh you know you don't see many tax laws that are passed that act, you know, that is a great benefit to someone. You know, is this is meant for kind of the leftover. If there's leftovers behind the 529, um, you can move that into a Roth for that that you know child, I'll say that that's that's a fantastic rule. That's a new one, honestly. There's not a lot of um new rules that kind of sneak up on it on me, at least. Um I I was only aware of this one about six months ago, honestly. Yeah. Um, so um that's a great rule.

SPEAKER_02 14:04

Yep. And then um one one last thing before we wrap it up, but like honestly, like a Roth IRA um is a great legacy tool. Yes. Um it it's it's if you plan on having a legacy and leaving money behind, um, obviously if you have a non-qualified account, they'll have the step up. But a traditional IRA is maybe it's the worst, it it obviously leaving something behind is important, but it's a traditional IRA might be one of the worst um accounts to leave behind. Because think of it this way um you're gonna give that account to your next generation, and they're gonna inherit it, they have to liquidate it within 10 years. And think about when they're going to inherit it and start liquidating it. It's probably because they're in they're probably most likely going to be in their highest earning years, so they're gonna be forced to take it out on top of their income, and then all of this money that you have worked for to do it tax efficient and being tax having taxes on your mind. I know you've passed away, maybe you don't care, but they are um, you know, they're you're you're you you're letting the you're letting the government win. Right. Right? Like so what I'm trying to say here is that you know, if you take on the burden of paying taxes in this low tax environment and Roth converting for the next generation, you are giving them, you know, you're you're you're sticking it to the government and you're giving your kids something that is tax-free.

SPEAKER_01 15:33

Yep, absolutely.

SPEAKER_02 15:34

So they still have to liquidate it within 10 years, but every they can let it cook for 10 years and take it one big out. Like if you inherit a traditional, let it cook for 10 years, it could double. Yeah. And now you're paying a monster amount of tax on a huge liquidity event. Right. So um legacy planning is is definitely uh a big, big key for a lot of people right now. Take care of the tax for the next generation because your income might be lower in retirement to do the Roth conversions, and we know that historically rates are low right now.

SPEAKER_01 16:06

Yep, absolutely. And you know, one thing I'll say um as we get into uh the final takeaways here, um, sometimes when you talk about Roth, there's always the um you know the the negative Nelly or whatever who says, well, you know, the government's just gonna get rid of Roth uh Roth IRAs, or the government's just going to you know not allow the tax benefit one day. And to that I will say, you know, if if you if you pay attention to Social Security at all, you know, the as soon as the politicians won't even mention Social Security because they will just get attacked, you know. It obviously needs to be reformed, but no one even talks about that.

SPEAKER_02 16:44

Yeah, they're not gonna touch that because it's gonna cost them an election.

SPEAKER_01 16:47

Exactly. So I'm on our seat. I would apply the same logic to you know reversing course on Roth IRAs. I think they're here to stay. Um and I think it would take a, you know, it would be a very bad situation if they started getting rid of tax advantage accounts like this, people that had that people have been planning for, paying taxes on for a generation. Yeah.

SPEAKER_02 17:10

So to kind of wrap this up, you know, reasons to do a Roth conversion, taxes are low, US debt is high. There's only one way to go to probably solve that problem, and that's tax us even more, unfortunately. There is no more stretch. The stuff needs to be liquidated within 10 years, and then a Roth IRA doesn't have RMDs. That's good for you and your income, but we just need to figure out how to pay that income. And that's what I want to the silver lining of this is don't run out and do a Roth conversion. So, like, let's just talk about that right now. Have a plan, have a coordinated plan. How long, how much do we want to convert? How much every year? You know, like maybe we don't convert the whole thing, right? It's like let's just think like it doesn't need all going to Roth. Maybe we're creating a new bucket. So work with an advisor, work with your CPA. Um, make sure that you're not oh, you know, we want to be diligent on how much taxes we're paying, uh, because it could affect things like Irma or Social Security. Um, uh there's a lot of different facets it can really mess up. Uh, so we have to be diligent and aware of everything around us when we're doing this.

SPEAKER_01 18:16

Yep, for sure. And you know, uh, that's a great point. You know, we're not saying to run out there and do Roth conversions, but a good call to action is to figure out what your marginal tax rate is. You know, I don't I don't know um if if uh a lot of people out there know what that is, but that's kind of the the bracket that you're in right now. Figure that out first and then and then you can go from there to see if if if if Roth conversions are right for you.

SPEAKER_02 18:40

Yeah. Uh and then the uh the other thing is is that um, you know, I find that Roth conversions are best for people who are retired because your income's over. Right. Doing it while you're still working, that's where you contribute to your Roth 401k. Yep. Uh doing conversions while you're working, like you're already making income and probably some of the highest income you've ever made, like tacking onto that is is a big issue, right? Or it it could just be counterintuitive. So let's be careful like the the concept of when to do it, how to do it, how much to do it, and what it's gonna really cost you.

SPEAKER_01 19:14

Yep, absolutely. All right. So, yeah, if you have questions on Roth uh Roth accounts, Roth conversions, or you have uh comments on the show, ideas for uh topics, you know, let us know at info at swpconnect.com, and we'll talk to you next week.

SPEAKER_00 19:31

The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment. Legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.