>> Matt Nelson: Would you ever pay more to the IRS on, um, purpose? Well, you might after watching this. I know it sounds counterintuitive, but for many professionals in higher tax brackets, there's a hidden planning window, especially around the 22 to 24% brackets, where paying taxes today can unlock years of tax free income in retirement. Let's talk about Roth conversions inside your 401 and why this strategy could be a financial secret weapon if the timing is right. Welcome back everyone. I'm Matt Nelson with Perspective 6 Wealth Advisors. And for over 25 years my team and I have been advising clients on what works and what doesn't in stock compensation and retirement planning. Today we're talking about the Roth 401 conversion. And when converting your pre tax savings into tax free dollars might be a good idea even if you have a high household income. Now I know what you might be thinking. Why in the world would I voluntarily give the IRS a bigger check? Well, let's unpack with an actual strategy. The in plan Roth conversion. If your 401k plan allows it, and many do, at this point, you'll have the option to convert your traditional pre tax 401k balances to Roth 401k inside your plan. Now that means you take the money you haven't yet paid tax on, you move it to the Roth side of the plan, and then you pay taxes due at that point, but never again. So the amount of the conversion is added to your gross income for the year and taxed as ordinary income. Now that means it has nothing to do with the capital gains or any appreciation in the account before it was converted. It's just taxed more like a paycheck. The important point here is that your taxes aren't due until the tax deadline. So typically around April 15th the following year. But depending on the size of your conversion, you'll probably want to make estimated tax payments ahead of time to avoid any underpayment penalties. Now, a Roth IRA conversion provides the option to pay estimated taxes due out of the account balance at the time of conversion. But this usually isn't the case with in Plan 401k conversions. So this is where the help of a tax preparer or an advisor team like mine can help with the estimates. But once you've paid the taxes from that point forward, your plan balance grows tax free and more importantly comes out tax free even for your heirs. But if you need to pay more taxes today when you why should high earners sometimes do this? Well, here's the twist. Let's say you're making a solid mid six figures. But then you find yourself temporarily in the 22 or even the 24% tax bracket because of a down income year. Maybe you have a job, transition, sabbatical or just a pause in your equity compensation. Maybe it's just because your deductions are really high for the year. But either way, this might be the perfect time to do a Roth conversion inside your 401 plan. Why? Well, because 22 or even 24% might actually be a discounted rate compared to what you'll face in retirement. Just for reference, a married filing jointly below 394,000 gets you into the 24% tax bracket and then below 207,000 puts you into the 22% bracket. And there are several reasons why you may not be in much lower tax brackets than these after you're done working. Number one, your base retirement income may be larger than you think. For instance, if you're going to have a pension income, maybe some deferred compensation on top of an already large amount of Social Security income, you could easily get into the 22% bracket or above. And that's because as a high earner you're probably maxing out the Social Security system. The maximum in 2025 for someone age 70 is around 60k a year. So for a dual income high earning couple, that's 120,000. Add a small pension and some income from deferred comp. On top of this you could have retirement income above 200,000 and that's before any dollars come out of your IRA or other investments. So now if you've also saved large balances in your pre tax 401 and IRAs, then your RMDs. The required minimum distributions can push you into even higher brackets in your 70s. Now on top of that it is not hard to imagine tax rates rising in the future. So believe it or not, current tax brackets are historically low and even a small shift in either the brackets or the percentages could add a significant cost to that scenario. Finally, add in any plans you might have of moving to a state with higher state income taxes and paying a 22 to 24% cost now could be a smart trade. Basically a bit of planning now for a multi generational amount of tax free growth. Who should consider this? Well I previewed this above, but you might want to think about this strategy if one you'll temporarily have a lower income year or a series of years. Now this could be from a career pause or taking a sabbatical. Maybe you're in an equity vesting window where income dips temporarily or you have an abnormally large amount of deductions. If you are a high income earner, don't don't let those low income years go to waste. Number two, you've already built up a large pre tax balance and you want some tax diversification. You want more control over your taxable income later in retirement. Number three, your plan is to leave assets to heirs and you want to do it tax efficiently. Now. This can be for a number of reasons, including thinking about how to pay the least amount of taxes across generations, not just your own tax return. This isn't about tax brackets, it's about tax control using today's rate to buy tomorrow's freedom. That said, there are a few caveats. First, you need to be careful about bumping into the next bracket accidentally. This isn't the end of the world. Since brackets are progressive, you'll usually pay the higher rate on just the amount that spills over. However, in some situations this could change the amount of taxes due on other areas of your tax return. So don't just blindly use the break in your tax brackets as a guideline now. Second, make sure you your plan allows for partial conversions. Most plans do, but there are some with stricter provisions that require 100% of the eligible balance when making a conversion. Now. If this is the case, the size of your balance and the tax situation are even more important to evaluate. Third, don't ignore the five year clock on Roth dollars when you convert money to a Roth 401 inside the same plan. A separate five year holding period applies to each conversion. So if you withdraw the amount you converted before that five years has passed, you could have a 10 early withdrawal penalty. And fourth, have cash set aside to pay the tax. Don't expect to use your 401k to pay for it. It is best to plan ahead with tax payment estimates and know what funds you'll use to make them. If not, you could have a large surprise plus penalties at tax time. So the bottom line Sometimes paying more tax now is actually the most strategic move you can make. If you're in the right window, converting a portion of Your Pre Tax 401 to Roth 401 could give you long term control, tax diversification and a more flexible income plan. Now if you want help evaluating this plan, reach out to our team at Perspective 6. That's what we're here for. And if you found this helpful, subscribe check out our other videos on retirement planning. Maximizing 401k or equity compensation. Thanks for watching. And remember, financial freedom takes more than money, so find your purpose and make a plan to live your life well. If you need any guidance, we're here to help. Investment advisory services offered through Savvy Advisors, Inc. 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