Episode 248: Are You Doing Roth Conversions the Wrong Way?

In the final part of the Retire With Style Live Q&A, Wade and Alex tackle listener questions on tax-efficient retirement withdrawals, Roth conversions, Social Security, sequence-of-returns risk, annuities, and buffered ETFs. They explain why smart tax planning goes beyond simply filling tax brackets, how to think about Roth conversions with lifetime taxes in mind, and when strategies involving HSAs, MYGAs, and annuities may play a role. It’s a practical look at how the different pieces of a retirement income plan can work together. Listen now to learn more!

Takeaways

• Tax brackets alone don’t tell the whole story: Roth conversion decisions should consider your effective marginal tax rate, including interactions with Social Security taxation, IRMAA, capital gains, deductions, ACA subsidies, and other tax provisions.
• The goal isn’t necessarily to eliminate your traditional IRA: Converting too much to Roth could leave you without enough taxable income later to take advantage of the standard deduction and other low-tax opportunities.
• Roth conversions can be front-loaded or spread over time: The better approach depends on the effective marginal tax rates available to you now versus those you may face later.
• Withdrawal sequencing should account for lifetime taxes, not just this year’s bill: Comparing taxable, IRA, and Roth withdrawals can help determine which source makes the most sense after considering the broader tax consequences.
• Saved HSA receipts may provide another strategic source for paying Roth conversion taxes: Qualified reimbursements could potentially provide tax-free funds in a year when a large conversion creates a significant tax bill.
• MYGA ladders can potentially serve double duty before Social Security: They may function as a buffer asset during poor markets while allowing interest to remain tax-deferred when the funds aren’t needed, preserving room for Roth conversions.
• Buffered ETFs trade some market upside for downside protection: They can potentially fill a structured-return role similar to certain indexed annuities when lifetime income guarantees aren’t the objective.
• Paying Roth conversion taxes from an IRA isn’t automatically a mistake: For those at least 59½, Wade notes that it can be workable, provided the additional taxable distribution needed to pay the tax is included in the conversion calculations.     
• Annuities inside an IRA may have an unexpected RMD-planning role: Wade describes emerging “RMD Shield” research examining whether annuity payments can help satisfy RMD requirements while reducing required distributions from other IRA assets and potentially preserving a larger legacy.

Chapters

00:00 Introduction to Retirement Tax Strategies
02:10 How the Tax Map Calculator Helps Minimize Taxes
04:03 Planning Roth Conversions and Managing RMDs
06:06 Using HSA Receipts for Tax Efficiency
08:01 Understanding IRMA Thresholds and Future Planning
11:05 Evaluating Roth Conversion Strategies: Gradual vs. Upfront
13:08 Effective Marginal Tax Rate and Its Importance
15:59 Handling Insufficient Assets for Roth Conversions
18:05 Buffered ETFs and Annuities as Retirement Tools
22:10 Paying Taxes from IRA and Managing Infinite Loops
25:04 Using Annuities to Reduce RMDs and Boost Legacy
26:50 Future Research and White Paper on RMD Shield

Links

📘 New Release: The Retirement Planning Guidebook (3rd Edition)
Wade Pfau’s must-read Retirement Planning Guidebook just got even better. The 3rd Edition is now available and packed with the latest updates to help you design your retirement strategy with confidence. Grab your copy on Amazon or your favorite book retailer: https://books2read.com/Retirement

This episode is sponsored by McLean Asset Management. Visit https://www.mcleanam.com/retirement-income-planning-llm/ to download McLean’s free eBook, “Retirement Income Planning”