Why Converting Your Entire IRA to Roth Might be Genius

About this video

• Video Title: Why Converting Your Entire IRA to Roth Might be Genius
• Channel: Ryan Janus, CFP®, EA
• Speakers: Ryan Janus
• Duration: 00:10:57

Overview

This video explains a tax planning strategy where retirees convert their entire traditional IRA to a Roth IRA. It uses a case study of a couple, Mike and Jenna, to demonstrate how this strategy can lead to significant tax savings, provide financial security for a surviving spouse, reduce lifetime Medicare costs, and create a larger tax-free inheritance for their children.

Key takeaways

• Strategic Roth Conversion: Converting a traditional IRA to a Roth IRA, even if it triggers a large tax bill, can be a beneficial long-term tax planning strategy.
• Problem Identification: The primary tax problem for retirees like Mike and Jenna isn't necessarily required minimum distributions (RMDs) from their IRAs, but the increased taxable income from reinvesting these RMDs into their brokerage accounts, leading to more interest, dividends, and capital gains.
• Benefits of Conversion: A Roth conversion strategy can lead to tax-free growth within the IRA, avoid higher tax brackets upon the death of a spouse (widow tax penalty), reduce lifetime Medicare premiums, and allow for a larger tax-free inheritance for beneficiaries.
• Conversion Strategy: Instead of converting the entire IRA balance in one year, it's more tax-efficient to stretch conversions over several years, potentially up to the top of the 24% tax bracket, to manage the immediate tax impact.
• Quantifiable Savings: For Mike and Jenna, this strategy is projected to save $1.7 million in taxes over 28 years, with a break-even point estimated in 2042, when they would be 84 and 82 years old, respectively.