>> Matt Nelson: So you've heard about Roth conversions, but does it make any sense for someone just about to retire? Well, today you're going to find out as we dig into the numbers. Welcome back, everyone. Today we're going to dig into whether Roth conversions make sense for someone that's just about to retire. It really depends on the mix of assets, the differences in ages when you retire, how long you're going to live, and just on and on. So today we're going to look at a simple set of decisions that we can make. Some different ways that you could go about converting a Roth ira, and if there's actually any benefit in the end. In future videos, we'll explore more specifics around exact ages you should look at, if it makes difference on your income and so forth. So let's just get into the numbers now. I'm going to share my screen, and we're going to look into our planning software. And today I'm going to start with a couple that we have. And of course, we've, uh, changed names for the purposes of this, uh, demo, but we're going to refer to Jerry and Ruth Crawford. And just as a highlight of their situation, this couple has a net worth of about $7.3 million. And that's made up of a, uh, little bit in their checking, uh, about a million dollars in an investment account. Jerry has an IRA, that's about 2.2 million. Ruth has an IRA, there's a couple of Roths, and then they have a couple of real estate properties. So that's the base facts that we're going to look at. And what we want to test out is if we can improve their retirement income or their ending portfolio value, uh, by looking at a Roth conversion. So one of the things we can look at is the total amount of taxes someone's going to pay over their lifetime. We're gonna start on our total taxes screen. And before making any changes in this couple's situation, you can see that they'll have about $4.2 million of taxes due over their lifetime from this point forward. Um, I didn't point out, but I'll point out here. Jerry and ruth are age 64 and 59. I have them retiring next year, so in 2026. And so from this point forward, as they finish up their working years, this last half of this year, and then start to draw down on their investments, that's where we get this cumulative tax number. Now, over their lifetime, they'll actually accumulate dollars in their portfolio, so close to $19 million at the end of life, all else equal in the assumptions we have going. Um, yes, it sounds like a large number, but you'd be surprised, uh, when someone has 3,4 million dollars in their portfolio to start. If they spend wisely, invest wisely, if they, it's amazing how much their portfolios accumulate by the end of life. So let's just now see if we can improve their situation. Sometimes clients ask me if they should just convert their entire IRA all at once. And let's look at that. Sometimes that actually works. Let's do a full Roth conversion. So I'm going to select that as an option. And in this case, what you'll see, uh, we're still on the total taxes screen and there's a huge number of taxes or amount of taxes that gets paid right off. What happens in this situation is that they actually pay less in taxes over their lifetime. 2.6 million in taxes less. However, their total portfolio at end of life drops by nearly $4 million. And so why is that happening? Well, they've paid a lot less in taxes, but they've done it so fast all upfront that the accumulation, uh, in the, in subsequent years just can't make up for that. In this particular case. And I won't dig into the details anymore, their fact pattern doesn't work well at all for a one time Roth conversion. Now let's see if we can improve that though. Let's take off the full Roth conversion and we'll look at a scenario where maybe we just tackle it a couple of years at a time. So maybe we target a tax bracket, go for a couple of years, see what the benefit is. What I did here is 175,000 of Jerry's IRA for the first two years in retirement. And what that does is it actually keeps us, keeps the uh, couple within or near that 22% bracket. And you'll notice that the results here, cumulative taxes, they're paying almost 500,000 less in taxes, but this time their portfolio actually has increased by almost 180,000, 179, 235 at the end of their life. So that's an improvement. That helps. Certainly it, it takes all the way out till their late 80s to see that, that benefit. But it is a, uh, significant improvement over just doing it all at once. So can we, can we actually optimize that a little bit more? What if we try to target tax brackets for the rest of the year? So if you notice in this graph here, these are low tax years and what's happening during these years is Ruth and Jerry are spending out of their non qualified cash. So they have about a million dollars at the start of this plan in an investment account. As we spend out of that portfolio, it's very tax favorable. So there'll be a lot of capital gains. Some of it's just return of their principal. Either way, it keeps them in a very low tax bracket in these early years and then later, as they hit required minimum distribution age. So in this case Jerry's age 75, their tax bracket jumps tremendously. So what we're going to do is try to fill up this space in between. We've got a tool to do that here where we can actually target the 12% bracket to fill that up. Now, if you notice, now we're paying taxes all in those lower years, uh, still not quite evening out with what they'll have later do later. But the end result is They've saved over 700,000 in taxes just by having this first few years of retirement, uh, filling up their 12% bracket, and it's improved their ending portfolio value about 284,000. So pretty big improvement. Uh, let's see if we can take it one notch further. Maybe we target actually the 22% bracket and see what happens there. Now the result, we're up to 1.8 million in saved taxes, tax savings over their lifetime, and their portfolio value has increased by 723,000. Now, what's happening here, we're going to change screens to the tax bracket screen. And what I want to show you is that when we get very precise about filling up the Roth conversions to the next level of taxes, that's when we can get, um, a much more optimal solution. In this case, we're filling up their 22% bracket. And you'll notice as we look at this federal bracket column, some of the years are just slightly over. And that has to do with some estimations and some other things going on in the software, uh, beyond the scope of this video. But in general, we're right around the 22% bracket for the first several years. And then as we get to, to, uh, Jerry's age 75 and he's starting to, um, have to take out required minimum distributions. Well, tax brackets are in a really nice low state because we've reduced the amount of tax liability that he has. Okay, is there anything else that we can improve here? Well, we haven't talked about this yet, but Social Security is a big item. Um, in this fact pattern, Jerry was going to start Social Security right away at retirement. But Instead, if we were to actually delay their Social Security or his Social Security to age 70, what's going to happen is we're going to reduce the income even further for the first few years until he's 70, which is going to allow us to convert even more in the Roth in those first few years and it's going to make even bigger impact. So, uh, let's toggle that on and see what happens. Now we're up to 1.8, almost 1.9 in tax savings. There's 920,000 more in the portfolio at the end of life. So we've really gotten somewhere. And this is all just simply playing with tax situations in the background. Just for those curious, I've made all of the investment returns the same. So this has nothing to do with investments being performing better in the Roth as we convert it. I've equalized everything. This is completely tax arbitrage. Okay. Now so far we've focused on the benefit at the end of life, so how much improvement in the portfolio we have, um, at the end of both of their lives. But let's just see what the difference is during their lifetime if there's actually any benefit. And then what I think is the real value is how much their heirs actually receive. So I'm going to switch over to a different screen here to help with this which going to look at their assets, their total assets. And so what this graph is showing is we have our base facts here, we have our, our conversion plan here, and I actually have selected age 70. So at age 70, when Jerry starts taking Social Security and we've been doing these Roth conversions all along, the total value of the portfolio, had they done Nothing, would be 5.8 million. With the Roth conversion strategy, they actually have less at age 70. They actually have a smaller portfolio, all else equal because they've had to pay taxes and there hasn't been enough time to make up for that. However, here's the difference. The tax free assets or the amount essentially in Roth IRAs versus what they have after Roth conversions is huge. So they now have $1.8 million that they could pull out without any taxes. That starts to add quite a bit of flexibility to their plan. Um, and it just starts to get better and better as the years go on. So what I'm trying to illustrate here is that you don't have to wait to end the life to start seeing some benefit in the flexibility of your plan. Uh, because keep in mind that this teal color, the tax deferred, that whole chunk essentially you can view as owning with the government. You don't fully own that. IRS wants a piece of it. And as we look at the pie, charts change. Uh, this, this red piece you pretty much own, that's all you, goes to your heirs all tax free as well. So if we could make this whole pie, you know, the red color, that'd be, that'd be the best scenario. Now let's go out to a later age. Let's go to age 80 and see the difference. Now out at age 80, still the total portfolio is different. But look at this 4.7 million in tax free assets. If we take it out to end a life now. And so earlier we had looked at how there was an improvement in the total by 920,000 and you can see that here that uh, 920,000 is reflected. So now the portfolio is actually larger after having done the Roth. And of the 19.8 million, 13 million of it is completely tax free. Completely tax free. And so the power of doing a Roth conversion during retirement, paying taxes early is absolutely a benefit. You just need to, uh, do it very carefully and think about how the tax brackets come together, what your strategy is. If you fill up certain tax brackets, if you do it all at once, there are scenarios we see where doing it all at once actually is an improvement. And maybe you just want to target a little bit at a time. Pick 10, 15, 20,000. And it's just a number you're comfortable with paying the taxes on for several years. So if you'd like us to take a look at your situation, let us know. And remember, until next time, financial freedom takes more than money. So find your purpose, Make a plan to live your life well. Take care of each other out there. Investment advisory services offered through Savvy Advisors, Inc. Other entities and or marketing names, products or services mentioned here are independent of Savvy Advisors, Inc.