Transcript

Voiceover: [00:00:00] Welcome to Retirement Unlocked with Larry Heller, Your life Your Way, unlimited possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode. 

Matt Halloran: Welcome back to Retirement Unlocked with Larry Heller.

As we head into year end, one of the questions we’re hearing more and more is, is now the right time for Roth conversions? Now Roth conversions and Roth IRAs offer big advantages. Tax-free growth, tax-free withdrawals, and no RMDs. Figuring out if a conversation makes sense and when to do it can feel complicated.

Let’s break it down. Larry, welcome to the show. Hey, Matt, great to see you. Listen, man. I know you guys get asked these questions all the time, so why Roth? Why do Roth IRAs matter so much in retirement planning? 

Larry Heller: Yeah, but actually I’m gonna, you know, we don’t actually get asked it so much [00:01:00] and that’s a big problem that the education out there, people don’t realize how great.

Roth conversions can be. So we’re proactively looking at every client and seeing how great this is. And unfortunately, sometimes we get people that miss the opportunity. So we’ll talk about when the best opportunity in, but the Roth conversion could be such a great opportunity for not only yourself, but even for the next generation.

So we’re gonna get. Into that. So let’s just go through some basics for everyone to kind of know the difference between a Roth and a traditional IRA, and then we can talk about how you go about doing the conversions. So while you’re working and you’re putting money away, you’re putting money away either through an IRA or you’re putting money away, most likely through a 401k plan.

And you could do one of two things. You could do traditional and most companies now offer an option of doing Roth. So there are a few [00:02:00] differences, but on a Roth, on a traditional IRA, the contributions that you’re making are pre-tax. You haven’t paid any taxes yet, and you’re gonna pay those taxes much later.

When you withdraw the money, the money grows tax deferred over time, but when you pull the money out later, then you gotta pay Uncle Sam. And then there’s also required minimum distributions, either at age 73 or if you’re born in 1960 or later than at age. 75. So if you expect to be in a lower tax bracket in retirement at a much higher right now, maybe a traditional is the best way of going.

On the flip side, you know, if you want to do a Roth, if you are in a lower bracket now and a higher bracket later on, the Roth kind of makes more sense because you’re taking after tax money now. But then when you get older and you wanna withdraw money out, you don’t pay any taxes and you also don’t have any required minimum distributions.

So there’s a lot more [00:03:00] flexibility when it comes out because a lot of people don’t realize how big the tax by can be because these accounts now were growing much longer. Before you had to withdraw your, take a requirement distribution at 70 and a half. Now you don’t have to do it to 75 if you’re 65 or, or born in 1960 or later.

So the growth on this, the compounding growth can bring your retirement accounts. So hay can kick you into a real high tax bracket. And that’s what we want to kind of look at now is for those that are gonna be in a high tax bracket later on, a Roth could make real, real s real, real, uh, sense. And there’s a lot of different things that Ross can do besides the taxes.

There is Medicaid surcharges. That, uh, a large requirement distribution for most people, the social security taxation won’t be hit anyway. But there are a couple of things like a Roth income won’t count odds where a traditional 401k will require min [00:04:00] minimum distribution will add to that. 

Matt Halloran: Larry, I’m, I’m gonna, I’m gonna pause you here.

Uh, I just want you to remind everybody, uh, that part of the financial planning process, you actually have the experience and the tools to know these things. I’m sorry, as I’m hearing you talk about this, I’m like, if I’m just the general public and I’m like, how does this guy actually know what my tax bracket’s gonna be when I’m 75?

You have the tools to do that. Is that a fair statement? 

Larry Heller: That that, that’s a great, great statement, Matt, because a lot of times when we do these Roth conversions, one of the questions I get is, why did my accountant talk to me about that? Because there’s a tax savings Yeah. Situation. It’s not really an investments there.

And I’m like, accountants are really trained to look at the tax planning right now, what your taxes are. They’re not trained. They don’t have the software. That’s not their expertise. We have the software to project out cashflow from now. To age a hundred or or plus. And year by year, look at what the tax brackets you’re gonna be in.

And it starts to show really quickly [00:05:00] what, what bracket you’re gonna be in. Then when we, we add in a, a Roth conversion, the computer will show you the differences that are in your pocket and how long it takes to break even, and then some of the planning tools that you can do. So yes, it’s a big part of what we do and we start planning on this.

Well before you’re retired, because there are other decisions that have to be made, you may want to defer your social security to be able to do some requirement to, to do more Roth conversions. So a lot of this planning is done way ahead of time with the idea of what we’re going to, what we’re gonna do when that time comes.

Matt Halloran: And I, I, I just, I wanted to remind everybody of that because I think you and I being in the industry, take that for granted that a lot of people really don’t realize that there’s a huge amount of tech math and planning behind these sorts of decisions that you’re helping your clients make so that they are going to be able to plan for that future.

Larry Heller: Yes, everyone, everyone likes doing the savings now, but later on they don’t like paying the [00:06:00] taxes later on. So yes, super important. Go figure to what we do. Yep. 

Matt Halloran: Alright, so you, somebody has a traditional IRA, right? How do you make that decision if a Roth conversion makes sense? 

Larry Heller: Right. And a traditional IRA.

Four Oh K four. We’re kind of talking about the same thing. So the ideal situations that we start looking at is like between age 60 and 75 and why are we doing that? And obviously it could be 60 and 73 if your require minimum distribution is, is at 73 is because those are the years when you may be.

Earning less. You may be retired. So everyone is different. So if you’re retired and you have no income from your salary, you could be in a much lower bracket if you’re not taking social Security, if you don’t have a pension. So those are the things that we look at. What is the right ideal? Timeframe, timing to do that.

There are other, there are other times where maybe the market is [00:07:00] really down and you want to take some out then, so what we call, you know, converting on a sale. So those are kind of the first thing is determining what the ideal timing is. Number two is determining your tax bracket management. And what do I mean by that?

What is your bracket gonna be in now next year, the following year? And then when your acquired minimum distribution is. So you can kind of see how that, what that is. And we sometimes that’s tax bracket creep that you can go. Very low tax bracket. We’ve seen clients at a zero tax bracket before their requirement distribution and at over 25% effective bracket when they have to take their requirement distribution.

So you wanna kind of look at possibly filling up the lower brackets and determining, okay, what am I comfortable paying? ’cause when you do a Roth conversion, just to be clear, you are paying the tax now and you have to pay that tax with. Other money. So you are paying money up front and you gotta really see, [00:08:00] okay, what is this gonna benefit me?

’cause I’m giving money to the government now. So looking at filling some lower brackets now may cause you to reduce your brackets later on and then pay less taxes later on. So using the software, coming up with the decisions, looking the at the projections will really give you clear cut, kind of what your savings can be on your taxes.

Matt Halloran: Okay. Again, not trying to derail you here, but you just by that last statement, I was just triggered with something. So what happens when the tax laws change, especially when you’re making these decisions? 

Larry Heller: You mean tax laws in the future or tax laws? Yeah. So they’ve changed the, the tax laws that they’ve actually made it better by deferring your required minimum distributions longer.

So that means your money is compounding without paying taxes along the, along those lines. So, uh, I mean, they’re not gonna be able to go back and. Change a Roth and make it taxable [00:09:00] so that, that, that kind of change wouldn’t, wouldn’t happen. ’cause that wouldn’t be really, wouldn’t be fair. You’ve already paid the taxes.

Right. Taxes on that. So a tax change really won’t have that, you know, have that impact on there. 

Matt Halloran: That’s actually where I wanted you to go there, Larry, is I wanted to talk about that. That the fact that you had already paid the taxes on that they’re not gonna be able to double dip and have you generally get taxed twice on that stuff.

Correct? Exactly. Okay. Alright. Now there’s a lot of strategy involved. Right. And, and, and this is not something for you as a, a financial advisor and your team at Heller Wealth Management to take lightly, but it’s also something that your clients need to really make sure that they’re making informed decisions because these can have major impacts on, on your retirement income.

What are some of the strategic considerations that people should be thinking about? 

Larry Heller: Right. Like I mentioned before, coordinating their conversions with other income streams. Do they have a pension? They’re gonna get, so security, you [00:10:00] know, sometimes people have annuities that they’ve deferred taxes on and eventually have to take money out.

So looking at those investments or trying to see what’s the ideal timeframe, like the, the, there’s usually what we call kind of a donut hole, where a couple years where your income could be lower, sometimes it’s only one year. ’cause you may be worked longer and you don’t have many years where you’re gonna have a lower income stream.

Sometimes people retire up. We have a client that’s gonna retire, actually we can’t even do Roth conversions ’cause it’s gonna be under 60, but we’re gonna have 15 years of low income. He’s got a lot of money from a, a retirement, um, a, a sale and he is got a huge amount in his retirement accounts. 15 years to looking, doing Roth conversions.

Once he hits 60 before 64, 59 and a half, you have a 10% penalty. So that timeframe, and looking at this, whether it’s a partial conversion, whether it’s a multi-year, just because you can convert doesn’t [00:11:00] mean you want to convert everything and pay so much tax now. So everyone’s a little bit. Different in their comfort, comfort zone.

So we wanna look at the income streams, we wanna look at how big of a conversion we wanna make. We wanna look at how many years we wanna look at this. And then we wanna do, and this is my favorite part of the planning when I start talking with clients. ’cause a lot of times the money in these IRA accounts, when they take the money out, they don’t need that money to live.

Yes. So they’ve kind of said, you know, these ira, this is gonna be from, you know, if my spouse needs it, great, but if they don’t, it’s gonna go to my heirs and that we can talk about a little bit. Now more, Matt gets into a whole nother area of planning where people that you talk about tax law change, that’s one of the tax law changes, really impacted the benefit of the Roth conversions.

Matt Halloran: So one of the things that, that you all do, I think so well, is that you are not just looking at the primaries, the matriarch, and the patriarch of the family. [00:12:00] You’re actually talking about doing planning for multi-generational family. Heller Wealth Management can actually become the family’s advisor for many generations.

H how. I mean, there seems to be some crazy pitfalls here with doing some of this stuff. When you’re thinking about the next generation, what, what are things that we need to talk about there? 

Larry Heller: Yeah, so Matt, I’ve been around long enough, companies have been around long enough that we now have third generation clients.

Wow. So, uh, so not only do we help, we, we, we have helped with with them and we continue to help with them. And yeah. So, you know, prior to the recent tax law changes, uh, leaving a. A retirement account to a child was great because they were able to take small amounts out for and stretch the require minimum distribution out many, many years, and getting the benefit of compounding at a pre-tax number.

And that was great, and the government finally put a stop to this. Unfortunately, there were some people that were just. Socking so much money away [00:13:00] into this and then transferring it to the next generation. The government got onto this and they basically said, nah, it’s great if you wanna leave it to your spouse, but if you’re gonna leave it to your child, we wanna get taxes within 10 years and we want to.

Require minimum distribution over that 10 year timeframe. So that becomes another whole planning scenario because guess what? Let’s say the spouse dies and they’re 85 years old, and now the child is 50. So now the child is in possibly their peak earning years, and now they’re gonna inherit sometimes multimillion dollars from a retirement account.

And what do they gotta do? They’re gotta take it out in 10 years. And guess what, Matt, they gotta pay taxes, not just based upon that amount. They gotta pay taxes based upon what they’re earning. Mm-hmm. So they can be in a super high tax bracket over those 10 years. [00:14:00] So converting to a Roth is a great, great opportunity.

For next generation. ’cause now what? Now what happens? Yes. You the, the children still have to withdraw the money over 10 years, but gets how much taxes they have to pay on that zero. So because it’s now in a Roth, they don’t have to worry about. Figuring out what their tax bracket is gonna be, what income they’re gonna earn and what year.

So we’ve actually had people that have inherited and they’re like, you know, maybe I’ll take a year off and it’s not work so I can take me my inherited, um, IRA out. And pay the taxes in that year. So it behooves to really start talking to people. And if you haven’t done a financial plan or a cashflow analysis to know what you’re gonna need during your lifetime, how do you know how much money you’re gonna leave to your kids?

And how can you do this planning and this Roth conversion? It’s a big puzzle with a lot of different pieces that we’re [00:15:00] trying to put together to solve that. And don’t miss this opportunity because if you, if you miss it during these. 10, 15 years, it’s gone. Yeah. 

Matt Halloran: Now. How long, so you, you have a, a, a client, an existing client or a new client who comes in and sits down with you or your team.

How long does this process take to be able to make this pivotal decision in retirement? 

Larry Heller: Well, you know, we’re first starting with a whole cash flow and retirement plan analysis to make sure that. The clients have enough money to live their life and enjoy life and make sure there’s enough money for, you know, for, for them.

Once. So once we’ve done that planning and shown people, okay, you’re got plenty of money here and you’re gonna be able to do what you wanna do, but you’re still gonna have growth in your portfolio for the growth, it’s gonna eventually go to your heirs. I mean, a lot of times I tell clients, spend more money, right?

[00:16:00] Because a lot of, if you don’t, it’s gonna go to Uncle Sam, but there is some type of tax planning we could do. So the process takes time. So not only doing the cash flow, looking at the retirement planning, and then going through the tax planning, we coordinate this of course, with your account. Um, but coordinating this and determining this and figuring it out ahead of time and having a gain plan because.

Then you wanna also kind of figure out what investments you’re doing in not only this, but then what are you doing in the Roth? So a lot of people now, when we do this, and it’s not an investment show, but we’ll talk about this for a second. When you’re converting to a Roth, if, especially if you’re giving it to.

To your child, even if you’re 65, you may live another 30 years. So what do we do with the inherited IRAs, the Roth conversions that were basically say it’s probably gonna go to the, to the children. We could be more aggressive. We could be, you know, even though you’re 65 years old, that pool of money. Yeah, it could be [00:17:00] more invested in the market because we’re looking at long-term growth in there.

So again, everyone is different on their risk tolerance and what they’re looking to do, but, so there’s all these different strategies and pieces that come into play when you’re creating not only the Roth conversion, the investment strategy, the tax planning. 

Matt Halloran: I just wanna remind the audience that, uh, you did a great, great show on the fact that you might need to spend more money in retirement.

It was really entertaining and I know that, uh, I know that the listeners really like it. All right, Larry, uh, bring it home. What else do we need to know? Right? 

Larry Heller: So again, Roth conversions that they’re super powerful, but it’s not one size fit all. There are scenarios where the Roth conversion doesn’t make sense, but what I really can say is.

Don’t we? We recently had a client that came to us after they started their requirement, DISTRI distributions, and unfortunately they had retired and they had six, seven years of very low earning, very low [00:18:00] taxable income, and they had a very, very high. Qualified retirement account because they invested very well before they came to us.

And that retirement account grew very high, but it’s gone. It’s too late. We couldn’t do the Roth conversion. This was a, a widower who was, didn’t leave money to their spouse and had plenty of other money to live on, and the opportunity was gone. So if that person had come to us five, six years earlier, we could have done these Roth conversions and saved.

In this case, hundreds of thousands of dollars potentially to their children. So don’t wait. Have these discussions. They’re super powerful, super important. There’s a lot of different strategies, and like I said, not one, not one size fits all. So speak to your. Advisor, speak to your financial advisor, speak to your accountant if he gets involved in this.

If he doesn’t, then you can give us a call. So that’s kind of the conclusion. [00:19:00] I mean, we love Roth conversions, we love having these conversations. Clients eyes lights up and like, wow, no one really kind of, you know, showed us how, how we can do this. So hopefully getting the word out there will get more people to kind of do what you said at the beginning.

Ask the question, should I be doing this rather than waiting and missing that opportunity. 

Matt Halloran: Alright. It’s all about asking the right questions to the right people and getting the right answers to help you really truly have your retirement unlocked. And thanks for joining us on Retirement Unlocked. If this episode helped you better understand Roth IRAs and conversions, be sure to like, subscribe and share it with somebody planning for retirement.

Also, if you wanna explore if a Roth conversion is right for you, check the episode description for a link to Heller Wealth Management, where you’ll find more resources and the opportunity to schedule a complimentary 20 minute call with the team. Smart Retirement moves. Start with good planning. So let’s start that conversation today.

We’ll see you next time on Retirement [00:20:00] Unlocked.