Why Roth Conversions Can Make Sense Later in Retirement

Got a real life financial planning scenario that illustrates why it's never too late to rule out doing Roth conversions. I've got that more coming up. My name is Mike Bernardo, I'm the host of the Wise Money Show. I'm also one of the certified financial planners right here at Core Horn Financial Group. Make sure you hit that subscribe button, turn on notifications and smash that thumbs up button. I think more and more people at the end of last year and maybe going into 2025 have asked themselves, should I do a Roth conversion? And that's great, that's great. And that proactive thinking, that's all about tax planning, which is one of the six areas of your financial life. Talking to one of our financial planners recently, he shared that helping a couple with a Roth conversion strategy over three years was projected to save them over $400,000 in taxes over their lifetimes, which is tremendous, right? However, one of the challenges, even though more and more people are asking themselves, should I do a Roth conversion? I think more people in the later stages of life or maybe the second half of retirement have sort of, are sort of not asking themselves this question or maybe it's not top of mind. You think I'm maybe set in my ways, I'm already taking RMD, my finances are set up and maybe, maybe, there's not as much curiosity or proactive planning at that stage in life. Well, just recently had a real life situation where I was coaching some folks that fit this mold, that are in the second half of retirement where it was blatantly obvious they should be doing Roth conversions. And we coached them on it, we taught it, and they gladly said, yeah, absolutely, because, and part of this was because we knew the financial situation of both generations. So here's a scenario, a couple in their late 70s, okay? They're obviously on social security. They also both have pensions. One's really small, one's pretty good, but between social security and these pensions, that just about covers all of their lifestyle. And they're sort of into the slower years of retirement. They have done a lot of traveling and not that they don't do any, but they don't do much anymore. And by the way, they're about to have their mortgage paid off. So we've asked the question before, do you need to be debt-free to enter retirement? Absolutely not. And yet they kind of elevated their house and took a step up at the beginning of retirement and they had a 15-year mortgage. And so it's gonna be paid off here shortly. And then their pension and social securities will absolutely cover their monthly expenses. They've got about 700,000 saved up for retirement and it's all pre-tax, by the way. They're taking their required minimum distributions, about 35 grand a year, and they're in the 22% tax bracket. So here's the question, just with that information, does it make sense for them to do a Roth conversion? Many people may argue no, especially because once you start your required minimum distribution, it's common knowledge you can't do a Roth conversion of your RMD. So many people think, well, that means as soon as my RMD starts, I shouldn't do a Roth conversion. The truth is you can take your RMD and then do a Roth conversion above and beyond that. But a lot of people would say, well, no, they're in the 22% tax bracket. So that's not necessarily a low tax bracket. But I would argue just even on the surface, without knowing any more that I'm about to share with you, you could argue, no, still do a Roth conversion because what happens if one of them is suddenly single, that one of them passes away, now they're gonna have social security income, they're gonna have pension income and could be in a higher tax bracket, right? Or the second reason, tax rates could go up and we don't know that. So those are a couple of reasons why, even though the social security and pensions are gonna, and RMDs will last the rest of their life and they'll likely stay in this kind of third tier, you could still do Roth conversions. But that's not the point why it's so obvious. Why it's so obvious for them, they've got two kids and we know the financial situation of each of them. Now the finances could change for sure. But one of the kids is themselves in the 24% tax bracket, married, they're both working, have two kids and they're at the bottom, so they're right at the beginning of the 24% tax bracket. And then the other individual is in the 32% tax bracket and sort of in the middle of the 32% tax bracket. So all things being equal and how rules work for inherited IRAs, if the two of them, say they're in their late 70s, if in five years they both pass away in their early 80s, and the two kids inherit the dollars, the two kids will be required to take a little bit out every single year, a required minimum distribution, but then also have the account emptied within 10 years. So you've got 700,000, assume it doesn't grow, or say it does grow, but they're taking this Roth, they're taking their RMDs. And so anyway, this $700,000, each of the kids gets 350,000, they've gotta take out a little bit, but even just assume $35,000 a year for the next 10 years, for one of the kids, that's gonna be in the 24% tax bracket. And for the other, it's gonna be at the 32% tax bracket, maybe even a little bit higher. So in this situation, in this situation, as we taught that and sort of illustrated the multi-generational planning available here, it was a no-brainer. And the folks saw it as well. They said, oh yeah, absolutely. Let's do a Roth conversion up to, ideally, they were thinking the top of the 22% tax bracket, but if you go all the way to the top of the 22% tax bracket, you've blown through the IRMA threshold, which would cause them to pay a surcharge on their Medicare Part B and Part D. So we decided to convert up to the top of the IRMA threshold, which is, oh, about, in their situation, I think about 40 grand. And the plan is to do that each year and start moving that 700,000. It's not like, well, in five years or whatever, that 700,000 will all be Roth, but it will start being able to move the needle. And that'll be fewer and fewer dollars that will need to be taxed at higher tax brackets than what mom and dad are currently paying. Now, I know the hesitations. You might be thinking, yeah, but what if, what if they're, you know, that's their money. They saved up. They shouldn't just be willing to pay the taxes for the kids. I know, but in their situation, they were living the life that they wanted. They are living the life that they wanted. So it wasn't a matter of, well, who's gonna spend these dollars. They were already thinking, well, these dollars are there for us if we need it. But based on what we can see, we're probably not gonna need it. And these dollars will be inherited by the kids. And therefore, taking a multi-generational approach really makes a lot of sense. This situation highlights the need for a comprehensive approach, looking at all six areas of your financial life, specifically tax planning, but also estate planning. Because in talking with mom and dad and talking about their estate plan and as that, how that connects with their retirement plan and their investment plan and their tax picture, it was revealed that, yeah, this strategy that on the surface, most people think, oh, late 70s at that stage, I don't need to be doing Roth conversions. But through the lens of comprehensive financial planning, revealed that this strategy made a ton of sense. So work with your certified financial planner on that, on all six areas of your financial life and in a multi-generational way. If you don't have a CFP on your team, you can contact one on my team. Find us online, cohorn.com. That's Cohorn with Kay, wisemoneyshow.com. You can find us there as well, or give us a call, 574-247-5898. All right, there you have it. Go out and take your next wise step in your financial life.