Don’t Make This Huge Roth Mistake

Brian Preston (0:07)

Don't make this huge Roth mistake.

Bo Hanson (0:11)

Brian, I am so excited because we love Roth dollars. They're some of the most valuable dollars that end up in our entire Army of Dollar bill. So if there's a mistake that one might be able to make with these dollars and with these accounts, we want to make sure that you do not make that mistake.

Brian Preston (0:29)

Yeah, and look, we don't make any secret about it.

We are big fans of Roth dollars. I mean, think about what you get with a Roth IRA. You get contributions. Yes, you don't get a deduction. That's the negative side of it. But it grows completely tax free. So this whole thing of compounding growth, this is giving you the best of it.

Bo Hanson (0:49)

Not only does it grow completely tax free for your lifetime, the other great thing is it grows completely tax free for up to 10 years of your beneficiary's lifetimes. And it's not subject to things like required minimum distributions and other things that regular 401Ks or traditional IRAs are subject to. So it really, really is a remarkable, amazing and wonderful thing. And the reason why we like them so much, or the reason why we talk about them so much is because they are so good. Often times, the federal government limits who can even put money in there. So a lot of people, as their incomes rise and as they make more money, they can't even contribute directly to Roth. And so they start trying to figure out what are some other ways, what are some other strategies, what are some other mechanisms that I can begin to beef up my Roth bucket.

Brian Preston (1:45)

And that's where, look, Roth conversions. This is a cool little tool that really got opened up.

If you think about in 2010, they took away the income limits on doing Roth conversions. So a lot of people get really excited about it. And that's why we want to make sure that we share the good, but also all the negatives, so you don't fall into some traps.

Bo Hanson (2:04)

And what a Roth conversion is, the actual textbook dictionary definition of Roth conversion is, we take pre-tax dollars, money that sits in a 401k, sits in an IRA, and we actually convert pay tax to turn those into Roth dollars. And they're so valuable that we actually did a wonderful episode with Bigger Pockets Money, where we walked through just how valuable a Roth conversion strategy can be. If you remember, we had Mindy and Carl, who had this huge portfolio and a lot of it in pre-tax retirement accounts. And what we showed them is because they had so much in assets, when they retired, when they actually left the workforce, they were going to be in this little tax desert, where essentially, from about the year 2030, all the way out until late into the early 2040s, they were going to have a very, very low tax situation. But if they waited and just let their pre-tax money continue to grow, when they got hit with required minimum distributions at the age of 75, they were going to go from being below the 22% federal tax bracket to now all of a sudden jumping into the 32%, and even the 35% tax bracket, which is a bit of a tax bomb that exists for folks who have big pre-tax IRAs.

Brian Preston (3:25)

Well, we were able to show them. Look, you can manage. It's a choice if you do good financial planning. You can manage those tax bombs, as you called it, because if you just, during those low income years, take advantage of doing some Roth conversion planning, we were able to show that we could actually increase their assets, the end value by almost $3 million, and then save them a little over $1.1 million of taxes paid to the federal government by just doing a little bit of prep. So Roth conversions, very powerful tool in your financial planning arsenal. However, there are times you got to be careful, and that's because there is a checklist you ought to go through to figure out, should I pay the taxes now, pay it later. And that's why we wanted to cover today's show, because there was actually an article that came out, and this was, who did this article? This was, was this Forbes? So Forbes had the five times you should absolutely not do a Roth conversion. And we wanted to kind of cover that, because people can get excited when they see an episode like we did with Making a Millionaire with Mindy, that we had, I remember we had a close friend.