To convert or not…that is the question

0:00 Welcome to something more with Chris Boyd. Chris Boyd is a certified financial planner, practitioner and senior vice president, financial advisor at wealth enhancement group. One of the nation's largest registered investment advisors. We call it something more because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to another episode of something more with Chris Boyd. My name is Jeff Perry. I'm a financial advisor with the team AMR of wealth enhancement group.

0:42 And I'm sitting in for Chris today, who's working with some clients today. So he left the control panel to my partner today, Russ Ball. Russ, welcome. Thank you. Thank you, Jeff. And myself. And, um, so we're going to try not to screw this up too bad. Right, Russ? That's right. So Russ, you know, for the, for our regular listeners, and we have a lot of listeners who listen to every episodes. And then of course we have occasional listeners who listen to some, this could be someone's first time hearing you. How, how long have you been on part of our team now? How long has it been? So I started on November 4th, I believe. So we're coming on three months here. Okay.

1:23 Yeah. It's been a, it's been a great ride so far. Time goes quickly. I felt more like a month to me, maybe six months to you. I don't know. I know we have the holidays in there, a few different, you know, long weekends. So, uh, yeah, it's all kind of jumbled in with the holidays, but yeah, almost three months. So how's it going? Great, great. I love, I love everything about it. I, um, um, what do you like the most? I love to ask like new employees or people like, well, first of all, was it, is it what you expected? It would be working. You have some background working in the financial services industry, so you probably had some sense of what it could be like. Is it what you expected?

2:03 Yeah. I mean, I feel like it's definitely been a better experience than I, than I expected, which is, you know, great. All I could ask for. Um, I, I had exposure to, uh, working with a number of different advisor teams throughout the country, uh, but actually being on a team and a team that, you know, I feel like I get along with everyone on the team and it's really good, um, environment to work in. So, uh, that has really surpassed my expectations. I'm not surprised that, you know, when I, when I joined in March of 21, so I'm coming up on my four-year anniversary. I knew Chris before. I don't think you did. No, no.

2:44 No. So I knew Chris before, uh, from community. We lived in the same community and, um, politics and different things that our paths crossed. So I had a sense that he and Kristen were like super, uh, easy to easygoing people with a lot of integrity. They really cared about their customers. So that's what attracted me. You know, I felt like I was going into a good environment, but you were kind of more in the dark. So that's probably why it exceeded your expectations, right? Yeah. And I think from, from the interview phase, uh, it was, you know, we, we had a good rapport and, um, it seemed like the type of team I would really want to be joining and pursuing this side of my career.

3:27 Well, you've been a great fit so far. Is there something that you particularly enjoy as your, you know, day-to-day different thing? You do a lot of different things cause we all do a lot of different things to serve our customers. But, um, is there something you particularly enjoy? Yeah. And I have, uh, you know, friends that, that know I started a new job recently, asked the same question and I referenced the fact that, uh, day one, you know, I was, I was just getting to know the people I was working with. I was immediately meeting with clients and a big reason why I wanted to work in the field as opposed to like the backend, the corporate side of this industry is to work with clients and to talk to people and help people with their, with their financial lives.

4:11 So having that exposure day one was like, wow, this is, uh, couldn't, couldn't ask for more than this. Um, so yeah, I think that's been a real, you know, and the fact that Chris and the team is, you know, trusting me to be part of those conversations and getting to meet our clients and getting to know them has really been amazing. So that was the goal. And that's what, what I, um, yeah, but how it turned out as well. So great. Well, you're doing a good job, but from my point of view, I don't have to supervise you obviously, but it seems like you're a integral part of the team and gaining more value with each passing month. Thanks Jeff. I feel like definitely learning a lot. Um, for sure. Yep.

4:51 Um, but I know we, uh, we want to hop on here today to talk about a article that you recently wrote for the street. And, uh, I know it was picked up by a couple of other publications online, including MSN. So, um, let's, let's dive into that article that you wrote Jeff. Yeah. To convert or not in 2025 was the title that I gave the article and, um, you know, I was trying to get some eyes on it. Right. So I didn't want, I wanted to get people, you want them to click it, to read it. Right. And it's on mostly financial sites. So, you know, when I hear convert, like most people, when you're not thinking about finances, you're thinking about a religious conversion, right.

5:32 Or something like that. So that's not what we're talking about. If you're listening in and wondering if we're going to try to sway you to one denomination or the other, we're going to disappoint you. But, uh, we're talking about Roth conversions, Roth IRAs. And so for our, our listeners who may not know the term, uh, a Roth IRA is an IRA that is a little bit different than the traditional IRA in the sense that the benefit of a Roth IRA and why you would do it is everything that you would draw later in life, when you retire and you need the funds, or you want the funds generally, there's some rules that we can dig into, but generally comes out tax free.

6:12 The downside, if you will, or the reason why some people don't choose to do a Roth is that money going in your contributions are pre-taxed, right? So you don't get that, you know, some people contribute to a 401k or an IRA in part, because they like the tax deduction off their income taxes. Right. Uh, this is not the case for the Roth IRA. You, you don't get any deductions for it. And the reward is when you take it out, you don't pay any taxes. So I think over the years, um, the value, the inherent value of the Roth IRA has been growing and growing, and people really kind of want some funds in a Roth IRA at some point in their retirement.

6:56 And you can do that through contributions, right? You can contribute to an IRA, um, every year. And there's limits this year, 2025, the limits are $7,000. I believe into a Roth IRA. We'll just talk about those for now. Um, and $8,000, if you're 50 or over, when you think about contributions, there are some income limits. So, and this is another reason why some people may choose to convert. We'll talk about that. Um, but if you are a married couple, your 2025 contribution of seven or $8,000, depending how old you are, if you go over $246,000, you are not eligible to make a Roth contribution, right?

7:41 If you're under 236,000, you are eligible. And there's that $10,000. I don't know why they did this. I, there's this $10,000 space where you can make a partial contribution if you're over 236, but under 246, just to confuse things a little bit more. Yeah, I get, they could have a partial contribution limit and, you know, they could have a partial limit, but to make it only $10,000, uh, that Delta is, I don't know, I don't see the logic in there, but it is, maybe it's just to confuse people and keep the CPAs and the financial advisors employed. Right. Could be.

8:21 Well, that, so that's, and that's one piece of the, the Roth IRA is the, you know, contributions up to 7,000. That's what I try to max out every year. Uh, it's definitely a goal that's seemed, you know, relatively attainable for a good amount of people. And, um, it's something that you're rewarding your future self for, for, um, that, you know, tax payment that you're basically making right now. So, uh, there's the other aspect of that as well as the, um, a lot of retirement plans through work offer a Roth option. So that's another way to, to contribute or a tax-free. Yeah, that's, that's, that's, that's really something relatively new. You know, when people have a 401k or whatever the retirement plan they have, I think most people have 401ks.

9:08 Some people have simple IRAs. If maybe they're working for a small company or a SEP, if they're, you know, working individually, but thinking about the 401ks when 401ks have been around for decades, but you didn't have the Roth option and even when you started to have the Roth option legally, a lot of companies didn't adopt it for their particular employees. But I think the demand from employees, you know, asking their HR directors and their supervisors, can I have a Roth? Can I have a Roth is really grown. And it's, I'd say it's, I don't know. Do you agree? It's kind of the standard now that most corporations that you work for have that Roth option. At least from what I've seen. Yeah, probably.

9:49 You know, definitely the larger corporations out there would, would, would offer that as an option. Now, again, it comes back to the question, like you said, you know, would I rather pay taxes on an hour or down the road? And a lot of the time people like those 401ks, those traditional 401ks, because that money goes in pre-tax from your, from your paycheck. So there's obviously a lot to like there, but then the Roth portion, and I think we'll, we'll dive more into this is something that can really be beneficial when you're entering that retirement visa or nearing that retirement. Yeah. And like so many things in the financial planning sector is it depends, you know, what's your best choice?

10:31 It depends. Right. And it also is not an all or nothing. So if you're just starting out, for example, and you're saying, all right, this is my first real job. I have this opportunity to make contributions to both, to either. That's your choice. You can do either or both. You can, most companies let you split it up. So I'd love it. I love when clients or people that I advise do both because the younger you are, you know, you get all this years of compounding and you get all this, this years of growth and all of that. Think about that. You know, when you retire, if you're starting at 25, if you retire in 30 or 40 years, getting all those earnings and all that growth and in a setting, a setting that is totally tax free, that, that is pretty powerful.

11:24 Yeah. Yeah. And that's a big reason why a lot of people like to use the Roth as something to use at the very end when the last, the last thing that you touch in retirement, because it's has all that growth potential without the tax impact and without the RMDs, but I know we'll dive into a little bit more, I think back to the conversion question, I think in your article, Jeff, you, you write about a couple of questions that investors need to consider before they think, Oh, let's just convert everything or, or let's not do a conversion at all. What, what do you, what do you make? What do you think those two key questions are for, for investors? Right. So two questions, whether or not you, so the scenario is the typical scenario is you have all or most of your retirement savings in a traditional IRA or traditional 401k, and you're now being, you know, you're getting older and you're thinking about your planning and you're saying, gee, I really wish I had some money in a Roth so later I could get this money out tax free, or later I could give a bequest this money to my heirs and transfer tax free and they could have a tax free or whatever the reasons is, or I don't want to take RMD someday.

12:36 I don't think I'm going to need it. So there's no RMD in a Roth. So that you're at, people are asking themselves or clients are asking us, so should I, should I convert, which the IRS code allows us to do some or all of traditional IRA to a Roth conversion? So the question is, do I want to pay the taxes now to convert? Because any amount you convert a traditional IRA to a Roth IRA is 100% taxable. So if you're going to convert, say you have a IRA for a hundred thousand dollars and you convert the a hundred thousand dollars in that year that you convert that a hundred thousand dollars, that is all ordinary income.

13:23 It goes on to your earned income. You're going to be taxed on it. So is it worth it to do that? And those two questions that you alluded to are, where am I in my own personal income level and my own tax bracket in the year that I'm going to do it? So let's say for example, you're in a year that happens to be, for some reason, you're having a low level of earned income that year. Maybe you've started a business, maybe you're been unemployed for a while. You took a sabbatical. Whatever the situation is, you just happen that year to have an income level that's less than you normally have.

14:05 So therefore you have a tax bracket. You're probably in a lower tax bracket than you usually are, than you expect to be in the future, right? So if you are, and you're thinking about a Roth conversion, the fact that your income is level in this given tax year, it's a compelling reason on the plus side of doing a conversion because you might still be in the, you know, to use the extreme example, you might still be in the 15 % tax bracket and maybe you believe in your future earnings years or historically you've been in the 24% tax bracket, so this could strategically be a reason to convert the money this year. And on the flip side, let's say you're thinking about a Roth conversion for 2025 and you're in a really, you're in a peak of your earning season.

14:50 Uh, you're, you know, you're making two, $300 ,000 a year, you're, you know, your, your tax brackets up there. And you might even jump tax brackets by adding this $100,000 in hypothetical Roth conversion to your income. And you might be paying more in taxes than you might later in life. So it might not be the right time. That's kind of the first question is where are you in your own income tax bracket level? Is it a good time for you personally to think about this? Right. And I think a lot of, uh, clients have been asking about Roth conversions. I think it's, um, kind of gaining a little bit more popularity.

15:32 Uh, people are starting to consider these types of things. And, um, it really does come down to, well, uh, where's your income now? And, um, is it, is there any, uh, is there any period in the, in the next couple of years where it's going to be lower or is there anything you anticipate that would, would make it lower? And if it's lower, obviously it leaves more of that room in that tax bracket to, uh, to get some more, some more income and not, not have a big effect on it. Right. So there's two like little asterisks I'll put next to those comments, like danger, danger, go away. You know, um, one is Irma, which is a. Calculation that they have when you're a couple of years out from filing for Medicare at age 65.

16:17 Medicare looks at your income two years back. So say when you hit age 63 to calculate what your premium will be for Medicare. So you may be thinking, well, I'm retiring when I'm 62. Um, so my income is going to be low. I'm just going to be using my investment. So I'm not going to have any earned income. I'm just going to investment income. So maybe I'll convert my a hundred thousand dollars. We'll just keep that same figure. When I'm 63 and I'm in a very low tax bracket, well, that's going to be on your tax return, discerned income, right? So it could, you could do it at exactly the wrong time when you're thinking about how low is my Medicare premium going to be, right?

17:00 So that's something you just got to like, stay away from if you're close to that age or some, or some other type of benefit that you may be able to receive. That's based on income. Just be aware that this is going to come as a taxable event. That's going to look like income on your tax return and it could skew a different benefit. The other asterisks I want to make is this is not a all or nothing proposition. We're using this a hundred thousand dollar example, but if you are in, say you're in the 22% tax bracket and you've got a little bit of room before you jump up to the 24% tax bracket, meaning you, your income is like $20,000 below the next tax bracket.

17:44 Well, you can convert $20,000 and stay within the tax bracket you're in. You don't have to convert your entire IRA. You convert as much as you're comfortable with, or maybe as much as you want to pay taxes on. Because, you know, sometimes people get in trouble by making financial decisions in life that impact your taxes. And they say, I'll worry about the taxes later. Yeah. So if you're converting this kind of, you know, big money here, a hundred thousand dollars, $50,000, whatever it is. You have the option of withholding the taxes from the conversion, paying the taxes through withholding, which is not wrong, we don't suggest it.

18:26 We'd rather have you pay the taxes from other taxable accounts or savings that you have so you don't lose the money that's in that IRA setting. But whichever way you do it, make sure you are prepared to pay the taxes. Right. Yeah. I think that's a, that's a key point. Um, in order to really maximize, and you read about this in the article too, in order to maximize the benefit of that Roth IRA, that it's not taxable. You don't want to take tax money out of there to pay the taxes. So if, if you anticipate a Roth coming, I mean, a Roth conversion coming up, having some money saved on the sidelines to pay those taxes would be the ideal way to.

19:10 It is the ideal way. And this is where age, your age starts to come into it. Um, cause in essence, you're, let's say you're in the 24% tax bracket. And if you live in a state with a state income tax, that might be another 5% for Massachusetts, I think that's what it is. So, you know, you're close to 30% that's going to be contributed from another account or withheld. And if you're nearing retirement, even though it's still going to be in this tax-free setting after the conversion, it depends on when you're going to be withdrawing, if you, it doesn't make a lot of sense if you're going to convert and then start withdrawing. Right. Like, cause you're going to miss all those additional years of tax-free compounding.

19:54 Right. Yeah. So there's a lot of thought that goes into, you know, your own personal situation, when do I need the money? What's my current tax bracket? What do I think it's going to be? And these other caveats of, should I do a little bit? Should I do a lot? Does this affect any other benefits I have like Medicare? Right. Uh, the other, the other question of my two part question, that was a long part of question one. Uh, the other one's simpler, but less clear, right? So the question is, where do you think federal income taxes are headed in the future? So we have the tax cuts and job deck that we're living in now, um, where the brackets were reduced.

20:38 And so we're, we're in a period of lower than typical, lower than historical income taxes. It, you know, president Trump was reelected or elected. How would you say that? Cause he had a hiatus. Yep. So he's in office and he's hoping to pass an extension to that tax cut and jobs act. And so we could be staying in these tax rates for a few more years. So that's good, but kind of your, your general sense of where do you think income taxes are headed? And you may say, well, I have no idea. Taxes go up and go down. How would I be able to predict that? Well, that's an accurate thought, but you can think about it generally.

21:20 You know, we're in a period of record high budget deficits and national debt levels of $37 trillion. We have a social security crisis coming in nine years where, you know, if we don't do reforms, which reforms usually cost us money, right. And money comes primarily from taxes. Um, and then we have Medicare that needs to be reformed as well. We are having a peace through strength type, uh, president, which means increased military spending. I know they have doge and they're trying to cut spending and I wish them well, but it's tough. So, you know, the question is, do you think after president Trump say, do you think that there is a period of higher or lower federal taxes?

22:09 Which means I'm going to pay higher federal taxes if I do a Roth conversion later, or if all my money is in a traditional IRA, when it comes out. So if you believe that higher taxes are in your future, either when you do a conversion or when you would draw your traditional money, that kind of puts the thumb on the scale to say, maybe it's a good time to do it now. Right. Right. Yeah. At least that's my logic. I think, so I was listening to a, uh, another podcast with, um, a guy named Ed slot and his name is very familiar in the, uh, wealth management industry and finance in general, he is a sort of, uh, IRA and, um, as a tax expert, tax guru, uh, he's the go-to guy really out there in the United States.

23:00 He is, he is. And, um, what he was saying was, uh, you know, yeah, you might think like some people might think that taxes are going to be lower in the future. Uh, they've done a bunch of surveys. Most people don't think that most people think it's probably going to go higher. So, uh, if that's the case, taxes may not be lower than they are today. Why not take advantage? Um, ASAP, if, you know, if it matches what you're, what you're looking for and what your needs are. Yeah. Um, and yeah, I think, uh, his point as well in that, in that podcast, uh, that I was listening to was, uh, he's, he loves, uh, the Roth IRA. He does not seem to love a traditional IRA just because, uh, you know, the, the tax impact of, of taking RMDs and, and, um, over time that basically increasing your, your tax bracket and, um, making it pay, pay more in taxes potentially.

23:52 So, um, definitely a lot of, uh, uh, key things to consider. Um, one question I had for you as well, Jeff, uh, when would someone typically think about, uh, a Roth conversion? When would be at me like an ideal time? And I know it, it depends. It's different for everyone's circumstances, but if a Roth conversion was something that really wanted to do, or really we're considering. When would be a typical time in the life cycle and the career cycle that would take place? I think anytime that you're starting to build wealth, you know, you have control of your budget, your meeting, your expense, monthly expenses, you have your emergency fund, you're saving for retirement, I think as early as when you start saving for retirement is a, you know, that's not so much a conversion is where should I put my money?

24:35 Right. But at any time, uh, before your retirement, you should be thinking about this and if you're working with a trusted financial advisor, fiduciary, someone who has your best interest at heart as compared to maybe someone selling you a product, right. Someone who's compensated, not on what they sell you, but on how well you do generally speaking. Um, sit down with them and discuss it. There's so many factors, you know, we're just touching on kind of the big ones here, but, you know, I'll just touch on a few other reasons why you might want to have a Roth and so, which would add, um, add the thumb on the scale to maybe I should talk to my advisor about this is it's stay with me on this.

25:20 Cause it's kind of counterintuitive. You know, a lot of people, one of their biggest, um, risks to their financial plan and one of the things they worry about the most is a long-term care event. And they go through that process of, should I buy insurance or, you know, should I have a trust and hide, not hide, uh, segregate all of my assets from potentially receiving some government assistance, right? How am I going to handle this? This could be three or $400,000 event. If I was in a long-term care and it's not covered by Medicare, the only the first a hundred days is. So a Roth, well, well, not designed for, or commonly thought of, of, of a way to dealing with future long-term care event can be just that if.

26:08 And why would I use a Roth? Well, you'd use a Roth because you never have to take money out. Meaning you don't have RMDs. If you have a traditional IRA that you're thinking, well, I can use my IRA money. Remember two things about that traditional IRA. One is at age 73 or 75, you're going to be taking our RMDs so that you're going to be diminishing that account, which is what you're supposed to do in retirement, you're supposed to take your money and it's taxable when it comes out. So if you're taking large chunks out of that to fund a long-term care event, you're adding another 30% to your withdrawals or the cost of your long-term care event. Right. So if you have these funds, segregated funds in a Roth, it can serve certainly to supplement your retirement if you need it, but if you don't need it, especially in the early part of your retirement, and it's just building compounding, it's a great segregated nest egg to say, well, I've saved this and it's here for long-term care.

27:10 If I need it. Another reason to have a Roth and to consider a conversion and build up that account is legacy, a Roth. So if you pass for the Roth and your beneficiaries, they receive that tax free. If it's a spouse, that Roth can be inherited to the spouse. They just keep the Roth. There's no withdrawal schedule. There's no RMDs for the spouse. They just have it all come out tax free. If it's not a spouse, there's a five -year rule on that, but the funds still come out tax free. There's some asterisks there, if the money's been there for five years and so forth.

27:54 So it's a great way to think about legacy as well. If you receive an inheritance, you're thankful that your loved one left you something. You're not going to say, is it a traditional IRA or a Roth? Oh no, it's a traditional. I don't want it. Of course not. Right? Right. But if you're offered two, with the same amount of money in each one, pick the Roth because there's a lot more flexibility and no taxes to pay if you follow the rules. And then when an heir would inherit a traditional IRA, they have to think about, well, how much am I taking out each year so that I'm still within a certain tax bracket?

28:35 It's kind of the same analysis, isn't it? There's a lot more to consider. Exactly. It's the same kind of thinking that goes into it. Whereas with the inherited Roth, you need to still take the money out after 10 years, but you could take it all at the 10th year, let it grow as much as possible, and the heir would receive that in the 10th year and not have to pay taxes on it. So pretty good deal. And again, like you mentioned, if it's not money that needs to be taken out right away, all the better. That would really only make sense if you did save it for the longer term. But yeah, I think it's a great option to consider. There's a lot that goes into it, and there's a lot that we can do on our end on the financial planning side to model what that might look like and when it might be a good time to make that conversion decision.

29:26 Yeah, it's a dynamic decision. It really depends on your circumstances. You know, we haven't even talked about life expectancy. We haven't even talked about a lot of factors that a good financial planner who knows you knows all these factors, and they can decide if it's something you need to think about, and then they can model it out. You know, you can actually have software that can model it out longer term and say, yes, there's a benefit, or no, I don't think there is. So good point. Any other last thoughts on that article, Jeff, that come to mind? No, you know what I'll do, Russ? I'll throw the article, the link to the article in the notes of the show. So if people want to read the whole article, they can read that.

30:07 And also in the notes of the show is a link to contact Chris Boyd, myself, or yourself, so we'd love to hear from you. And thanks for listening. And please tune in next time. Until then, keep striving for something more. Thank you for listening to Something More with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter. Whatever's on your mind, visit us at somethingmorewithchrisboyd .com, or call us toll free at 866 -771-8901. Or send us your questions to amr-info at wealthenhancement.com.

30:51 You're listening to Something More with Chris Boyd Financial Talk Show, Wealth Enhancement Advisory Services, and Jay Christopher Boyd provide investment advice on an individual basis to clients only. Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.