Do Roth conversions make sense for everyone? In this episode, we unpack the rules, strategies, and potential pitfalls of Roth conversions, as well as the role of taxes, spending, and charitable goals. You’ll learn why it’s not always wise to “just convert everything now” and why flexibility is a crucial part of any financial strategy.
Listen in to hear how to evaluate whether a Roth conversion truly adds value for your personal situation, why timing matters, and how one decision can ripple across your entire financial plan. By the end of the episode, you’ll have a clearer understanding of how to approach Roth conversions strategically and why working with a knowledgeable financial advisor can make all the difference.
Listen to the full episode here:
What you will learn:
- What a Roth conversion is. (4:05)
- Whether or not Roth conversions add value. (7:30)
- The importance of having a financial advisor who truly understands your needs. (10:00)
- When it makes most sense to do conversions. (15:25)
- Why flexibility in financial planning is important. (17:20)
- Why we can’t make financial decisions based on emotions. (22:20)
- The importance of having a customized financial plan. (27:40)
- How filing joint taxes as a married couple changes things. (35:00)
- Why we want to do Roth conversions over years. (42:00)
- Two Roth conversions that make sense all the time. (46:00)
Ideas Worth Sharing:
- “Part of planning is giving yourself flexibility.” – Mason & Associates
- “The water-cooler financial planners are not talking to you. They are talking in these vague concepts or these big-picture things that don’t apply to you individually. It needs to be customized to you individually. One action ripples across many different areas of your financial plan.” – Mason & Associates
- “Don’t make financial decisions without being fully informed.” – Mason & Associates
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
John Mason: Tommy, welcome to the Federal Employee Financial Planning Podcast.
Tommy Blackburn: John, thanks for being with me today. Thanks for doing this with me. It’s always a blast. I think it’s gonna be another fun topic. I know we get a little fired up about the topics. This is certainly gonna be one of them. And it’s never crystal clear either.
So we’ll fully acknowledge that that’s part of planning is giving yourself flexibility as we jump into this topic and acknowledging we don’t have a crystal ball. And I think about, John, as I kind of, again, just dive right into this. I know we’ll backpedal to get this intro done right, but you presented at something one time, and I remember you said you were questioned as to like, “Well, John, how could you not make an absolute statement?”
You said it appears, like how do you tell a client that? And it’s like, “Well, it’s because I am humble enough to acknowledge that there are a lot of factors and a lot of them are outside of our control. I don’t know what the future is. So the best that I can see right now is this, and this is my advice, but I want to acknowledge things change, which is why I also try to leave a flexible plan in place.” So the audience has no idea what I’m talking about, but hopefully this will all come together as we jump into it.
John Mason: Yes, I know exactly what you’re talking about and we will address that comment. That was at the Kitces’ Value Summit, where I was presenting on how we present an initial financial plan. Audience, today is November 19th, 2025. It is episode two, recording of the day. So thanks for being with us again. This should release sometime in January. So welcome to 2026. We hope you had a happy Thanksgiving, a merry Christmas, a good start to the new year.
This episode, we’re talking about Roth conversions. As you know, audience, TSP has in-plan conversions that are now available to you. So happy New Year. We should just convert everything to Roth. Bam, get it done, all million dollars, convert it tomorrow. And then let’s wait and see what happens on April 15th.
‘Cause it could be a big butt whooping. So if you’re not sensing the fact that I’m being a little sarcastic here, or disingenuous, I think, is another word, is that yes, Roth conversions can make sense. Just because now it is given to you doesn’t mean you should immediately start doing them.
Certainly, it doesn’t mean you should just do it all in a single year. There’s a lot to unpack here. So welcome to the new year. We hope you had a wonderful holiday season. We’re gonna unpack a lot, Tommy, with this Roth conversion topic. Everything from some rules within how we understand the end planning conversions are gonna go.
I know we covered this in the intro, social security, siloed decision making. There’s just so much for us to talk about. So why don’t we start with some of the rules for in-plan? Well, let’s define what a Roth conversion is, and then let’s also talk about what an in-plan conversion is and what that will look like for those who are still either A, employed. Or B, still have money in TSP.
Commercial: We’re excited to share that Mason & Associates has been recognized with an Inc. 5,000 award as one of America’s fastest-growing private companies. This recognition means the world to us, and it’s a direct result of our talented team, loyal clients and listeners like you who continue to support what we do. Thank you for being a part of this milestone with us, and we look forward to what’s ahead. This rating was given in August 2025 by Inc. in consideration for the 2024 calendar year. Per Inc’s methodology, an application fee was due to assist with processing applicants. Mason & Associates does not receive compensation by or for this rating.
Tommy Blackburn: Yeah, so at the basic concept here, Roth conversion is where we take IRA money, 401k, TSP pre-tax funds, funds that we have not been taxed on, and we move them into a Roth IRA. So everything that comes out of an IRA is generally taxable. There are a few exceptions, but distributions and so forth, taxable. Roth, so goes into the IRA. It’s not taxed. Grows tax deferred, comes out taxable. Roth is the opposite. Goes in after tax, grows tax deferred, generally comes out tax-free. When we move funds from the IRA, I’m saying an IRA pre-tax, when we move from pre-tax to Roth, that’s a taxable event. And the reason we’re doing that is because we believe for a number of reasons, that tax-free growth, tax-free distributions in the future is advantageous.
A lot to unpack there as to that analysis and how we determine it. It sounds very simple. There’s many, many factors to consider, but that is a taxable, that is a taxable transaction. The most simple math would tell you it is the same. So if we take a rate of return and we keep our taxes constant, whether we take a tax deduction today and reinvest, or we pay the tax today and don’t pay it in the future.
If those variables stay the same tax rate of return, it is the same result. So simply, so then it’s these other factors that matter. And they’re very, there are many of them that consider, they’re complicated, but stepping back, moving from pre-tax to Roth is taxable. There are a number of ways we can pay that tax, or a few ways to go about paying that tax.
I guess I’ll just jump right into it, John, so you can have the tax withheld. So money comes out of the IRA and say a hundred thousand for easy math. We could have 20% withheld. So 80,000 goes into the Roth, 20% goes to the government, the taxing agencies to pay it, wrinkles there, one is we didn’t, we only had 80,000 going into the Roth.
So there’s a method where we can pay the tax outside of the conversion so that actually a hundred thousand goes into the Roth. So that’s almost shoveling more money into the Roth. We would say this is a positive, if we can pay, generally pay the taxes outside of the conversion, we’re getting more money into a tax preference bucket.
If we have it withheld, less is gonna make it in, but it’s not the end of the world. We just think that’s less favorable. If we’re under 59 and a half and we have the taxes withheld, well, we just had an early distribution penalty. So something to be aware of on that and that I think brings us to the TSP in plan Roth conversions is. Our understanding is they’re not gonna withhold taxes on these conversions. So you could do this and then get hit come April 15th of, oh my, I’ve got this tax bill and I have no way, real good way to pay it, I guess, we’re in panic mode now at this point, potentially, of how do we pay for this conversion.
John Mason: Wow. That was a lot of information there. So I guess Roth IRAs came out, I believe, in 1996, potentially. It was back in the nineties and I think the first conversion started happening in about 1996, and that was the last time we had like a budget surplus, if my memory serves me correctly.
And the whole idea there was, “Hey, we have this beautiful tool called a Roth IRA, we’re gonna allow you to do Roth conversions. You certainly want to pay taxes today at these tax rates because taxes can only go up in the future.” Well, since 1996, tax rates have gone one way and that’s down. So I’m not saying that the people that did conversions in ‘96 were wrong, but making assumptions that emphatically like, yes, you must convert today because tax rates will only go one direction in the future, turned out to be materially incorrect over the last 20 years. So we need to think about that, Tommy, as you kinda led into this conversation, which, I said it appears that Roth conversions add value with the rules that we know today.
If they drop federal income tax rates to 0% a decade from now, and nobody pays any federal income tax ever again, Roth conversions were probably a really bad idea, I would guess. You paid 20 to 30% in taxes and now you could have got it out at zero. It appears to add value with what we know today.
It appears to add value based on your spending. It appears to add value based on your charitable giving goals, but you change all of those variables, and all of a sudden, maybe it appears that they don’t add value or we just dial one variable up some and maybe all of a sudden the value becomes less clear.
Tommy Blackburn: If I may, John, these variable, I just think it’s great to, can we just acknowledge the audience, everybody, having some humility here that you’re going on about these variables, which I fullheartedly agree with. My entire career, your entire career, we were told taxes are only gonna go up.
And I think it’s largely been the opposite and that income taxes have pretty much gone down our entire career. So counter to conventional wisdom. So we would agree it would appear that they’re probably gonna go up based upon the fiscal situation, but it has defied conventional wisdom and not taking a position on this, but tariffs.
So when you think like, well, they have to go up. Well, who thought the tariffs were gonna become what they’ve become? So let’s all have a little bit of humility here and just we don’t know, and the future can surprise us in ways that we were not expecting.
John Mason: Well, you sit down with a financial planner and you’re 62 years old, you’re about to retire federal. You’ve got the world by the tail. You just need somebody to show you how awesome it’s going to be. And the financial planner sits down and emphatically says that, “Yes, you must do Roth conversions.” And I’m not saying we haven’t emphatically said that to somebody before.
I’m just saying that somebody says, emphatically, you need to do Roth conversions. But they’ve only known you for a day, and you tell that person, “Well, I’m only gonna spend $3,000 a month.” And then two years later, it turns out you’re spending $10,000 a month. So bad data in, bad output, you gave the financial planner misinformation.
That misinformation resulted in maybe a less-than-stellar recommendation. So as we think about, as we get to know our clients, it’s kind of hard to emphatically recommend gigantic Roth conversions early in a relationship or early in retirement because we don’t really know what life looks like for them yet, Tommy, we don’t really know what they’re gonna spend.
We don’t really know. And I know one client in particular like this danger zone analogy, but anecdotally, it’s like 60 to 70 seems like the danger zone for the folks we work with. If they make it to 70, they seem like they live until 90, but bad things happen in your sixties. Heart attacks, cancers, strokes, all kinds of things seem like they happen right around the time people retire.
And let’s face it, that means that your life expectancy could drastically change in the first few years that you’ve hired a financial planner, and anchoring to an age 90 or 95 life expectancy for all of your Roth conversion analysis may not be appropriate.
Tommy Blackburn: Yes, I completely agree and the big theme that we want to say here, one is have some humility. We are big proponents, I still, even with the way things have changed, we really monitor for these Roth conversions. We generally recommend them in many situations. We don’t do it across the board. It needs to be customized to you and it needs to be a partnership. I think that’s the biggest thing is by having some humility.
It’s trying to have a partnership with the client of, “Here’s the ways we, maybe we could be wrong, and here’s what I’m seeing and here’s why I think it. Do you agree? Do you have other concerns? What are your thoughts on this?” And by having that honest conversation, we can both move forward together on the same page.
So it needs to be customized. By and large, we still very much believe in them, but we’ve gotta at least have a transparent conversation and analysis on it, which I believe and hope that we are doing with our clients. So just wanna put that out there. I think it kind of dives into the theme of saying that we have, which is if Roth conversions don’t hurt, they help you, which we really believe in.
There’s a big caveat there. If they hurt you, like the analysis shows that they hurt, they hurt. And there’s no reason to do this. And sometimes the analysis does show that where it’s like, “Hey, Roth conversions just really don’t make sense for you.” I wish they did, because I enjoy doing ’em or whatever, but that doesn’t, we’re not seeing it. Outside of that, though, even if we’re not showing that they help, if we’re not showing, if it’s not showing that it actually hurts you, for many reasons, we think they’re still good and are gonna end up helping you. We just don’t know, we don’t know how the future’s gonna unfold to really pin down exactly where they’re gonna help you. But there’s a number of paths where we can see that it does help you, depending on how the future unfolds.
John Mason: So I wanted to go back, real briefly, Tommy, to Roth conversions in 1996. They were income tested, I believe, so you have income test on Roth contributions. Then all of a sudden in 2010, I believe what ended up happening is they did away with the income limit on Roth conversions and then this ended up resulting in the backdoor Roth IRA contribution, the mega backdoor Roth IRA contribution. But then open up the door to the folks we work with, people enter near retirement with a million dollars or more saved that all of a sudden, now we can do Roth conversions regardless of how much income we make. Super interesting change that happened amazingly 15 years ago, but a lot of people could be operating under old rules still, which is, “I can’t do Roth conversions ’cause I make too much money.”
That rule has changed. There’s two questions I think that you need to ask when you’re thinking, “Do in-plan TSP conversions make sense? Do Roth conversions make sense?” So question number one is, does it make sense over a 30-year strategic vision? Question number two is, if they do make sense, when do they make sense?
Because just seeing that they make sense in the long-term vision doesn’t tell you when you should actually begin executing those. So we’ll unpack when we’re going to execute those conversions a little bit more. But Tommy, to your point about if they don’t hurt, they help. I’m just thinking about flexibility.
The thing that, and this is mainly for retirees rather than folks who are working. You mentioned the underpayment penalty. You mentioned the, we can’t have tax withheld or if we do have tax withheld under 59 and a half, we have early distribution penalty of 10%. So it’s a lot easier for retirees over 59 and a half to do conversions, ’cause you can do the withholding. Whereas if you’re under 59 and a half, you’re kind of either stuck to that additional penalty or estimated payments. But we do a lot of bracket-topping where folks are 20,000 or 30,000 away from hitting on IRMAA Medicare threshold, and we know that maybe we have some big spending coming up in the next few years, and it’s like, “Well, why don’t we go ahead, convert this 20,000 to Roth?”
We’re like banking it. We’re like, all right, well, there’s no reason to let this 20 grand go away because maybe next year we’ll get out that 20 in the next 20, and that can build your deck. And if you do that enough over the years, you’re banking those 20, 30, $40,000 conversions so that hopefully in the future when you do have that extra distribution or spending need, hopefully we’re not busting into the next tax bracket. Hopefully, we’re not busting a Medicare threshold. So I just think flexibility is one of the big things and as we record this November 19th, you know, you think about spreading distributions over multiple years, like we had one client call in to Mike the other day and say, “Hey, I need a hundred thousand for a home renovation.”
And he’s like, “Really? You need it all today, all November 19th. We can’t take some November 19th and some January 1st and spread it out over two years and…” And then Mike, for that matter, was like, “You think the project’s gonna take six months? It’s probably gonna take 12. And oh, by the way, you don’t have to pay the contractor a hundred percent of the money up front. So why don’t we just like bracket top this year, take a little bit of money next year and see how it plays out before we just bust a hundred thousand dollars out 45 days before the end of the year.”
Tommy Blackburn: Yeah, let’s use a, like, let’s come up with some ways to give us options. It’s a big theme. I think if you listen to us and the type of planning we try to emphasize with clients is flexibility. We really like to have the ability to bob and weave in different directions because this happens, and I had a similar conversation with a client where we’re focusing on end-of-year Roth conversions. A lot of times we delay these conversions.
Not always. Sometimes we feel pretty good about things and maybe we have other flexible arrows in the quiver, so to speak. So we know we have other routes depending on how life unfolds. But a lot of times these Roth conversions, we do them third, fourth quarter, give us a little bit more certainty that something hasn’t arisen in the year that throws the whole plan off.
So I was talking with them, John, and part of this was looking at, “Hey, we’ve got this new senior deduction,” so it was, 50,000 conversion made complete sense because they were still gonna be in the 12% bracket. So we gotta do that, right? It was like, that’s the give me, it’s hard to see us not wanting to do that.
And then the other part was now we’re starting to bleed into this senior deduction, which essentially adds another two to 3% onto the marginal bracket on these next dollars we’re converting. So you think you’re in the 22, but really we’re converting at like 24 or 25 because we’re losing this new senior deduction and it’s acknowledging that, hey, this, you know, ideally we were doing it at 22%. This, all of a sudden, we’re doing a little higher, we’re losing this deduction. But when we look out at your long-term strategic plan, we think about your children that you’re also trying to plan for. And we think about, you mentioned some children may need help, but it looks like when this year we’re in the clear, but next year we may need to give them some help, or maybe mom and dad, who are also having their own health issues.
It’s like we have all of these question marks in the future. And it was so, it was, “Hey, I think doing this amount, getting up close to the next Medicare premium threshold, but not crossing it, I think it makes sense from a long-term perspective. And a big part of this is flexibility.” And they completely agreed.
Well, initially, I just said, “What do you all think?” And then they turned it around and said, “Well, what do you think?” And it’s like, “Well, here’s exactly I would do it.” And the reason is everything I just laid out and they said, “Exactly what we’re thinking.” So it was an informed discussion, but trying to just acknowledge that was a recent example of you can’t underestimate flexibility in these when you’re thinking long term.
John Mason: That’s a really good point, Tommy, and the unintended consequences of a Roth conversion. I don’t, well, we know, I mean, most financial planners don’t know this, so we would have to assume most consumers don’t either. Or the unintended consequences of a conversion, like how many consumers at 63 years old are gonna be thinking a Roth conversion now is gonna impact my Irma at 65 when I’m haven’t even.
Thought about Medicare yet, most people probably not; they’re not gonna be thinking about, I know it’s not big now, but things like alternative minimum tax or phase outs or net investment income, or OTC, not AOC, OTC, American Opportunity Tax Credit phase outs or child tax credit phase outs.
You start looking, or Virginia, age 65 deduction. You start looking at all the things that, as you increase your income, the things that you start eliminating from yourself, even now, like going forward, there’s gonna be limits on charitable contributions. There’s gonna be a 0.5% threshold. Roth conversions also make it harder to deduct medical expenses because you’re raising the AGI threshold. Who does that?
I mean, at the end of the day, there’s probably a small percentage of financial planners that understand that. My fear is that people will just wholesale start doing big Roth conversions, and two things are gonna happen. One, they’re gonna have a gigantic surprise come April 15th of the following year with some pretty massive underpayment penalties and a pretty massive liability because guess what? TSP can’t provide tax advice. You should consult your tax advisor. So how easy is it going to be to do a conversion? I assume a few clicks of the button, a few clicks of a mouse, a hundred grand, a taxable income hits.
Guess what? You can’t recharacterize it. You can’t undo it. That’s a hundred thousand of income that you’re going to have to pay taxes on. That within 24 hours, you can’t, I mean, I’m just saying you realize the next day you made a mistake, you’ve got basically 365 days to figure out how to pay the tax on that best case, right? And so one that’s a big fear. Two, the other fear is that it’s just not well thought out. It’s based on, well, pick your political party. Republicans are gonna lose. Democrats are gonna come in and raise tax rates. “I must do conversions now.” Or, “I must do conversions now because the whole world’s gonna end.”
And you start making these decisions that are more emotional rather than based on data. We have to have some sort of 30, 40, 50-year tax plan, Tommy, before we can start implementing the annual tactical, ”How much and when are we gonna do the conversions?”
Tommy Blackburn: I love it. Yeah, ’cause we do, when we’re working with clients who like to say, here’s the strategic projection, like long-term directionally, kind of giving us some guidance here. And then let’s look at the tactical projection each year or year over year to make those tactical yearly decisions. I’m thinking, John, back to that recent conversation that I had, and it’s, this isn’t huge, we do it all the time, but going by like, okay, it’s taxable. How are we gonna pay the tax and I think it’s also just valuable to have this advisory relationship because it was, we don’t have cash to pay that tower. We wouldn’t want to use the cash we have right now to pay the tax, so probably should have it withheld, right?
And as the advisor, looking at the whole situation is we can do that. And I’m not opposed to it if that’s the route we want to go. However, we also have this brokerage account out there. And so it was, yes, you don’t have cash, but really what we should do is go sell some capital gain assets and I think we can do it very tax efficiently, where we’ll keep the gains low.
And who knows, maybe we even are able to rebalance the account some, so we can kind of do this here. This’ll get you the cash. We still get to do the whole amount. So not necessarily, well, I guess it does go as part of it. Like, TSPs not gonna walk you through any of that, right? And half the planners in the world aren’t gonna walk you through any of this. So just that good partnered relationship of seeing the whole picture and having a conversation around it.
John Mason: There are several reasons, Tommy, why Roth conversions don’t make sense. If you are going to be in a higher, a lower tax bracket in the future, Roth conversions may not make sense. If you have a million dollars in your TSP and at age 75 when RMDs kick in, 73 to 75 now, let’s say your RMD is 80,000 and you plan on, ’cause a million grew to 2 million, and audience, don’t barbecue me if my percentages are off, but you have an 80,000 RMD and you tell, Tommy, that you wanna donate 80,000 to charity. Well, we didn’t really win by doing all those Roth conversions because we could just be doing qualified charitable distributions at $80,000 a year, beginning at 70 and a half years old, because QCDs and RMDs aren’t linked anymore.
Why did we convert and pay all these taxes if the plan was to give it all away to charity? If you don’t have children and you’re leaving all your assets to charity, do we really need to bring all that tax forward if the charity is going to inherit all that money tax-free one day? Or what if your children are in very low tax brackets and you know they’re going to inherit and they’re gonna be in a 10 or 12% bracket or what if–I’m just saying that Roth conversions sound good on paper. Typically, if you kind of like fear monger it into this horrible situation that you need to like do something today to prevent something from happening in the future, there are several reasons why Roth conversions don’t make sense, and we see it with our clients all the time that there is a period of time where they can go from being in a 22 to 24% tax bracket while they’re working to being in a 12% bracket the year they retire.
So when we talked about our two questions, one, do they make sense? Two, when do they make sense? If you’re delaying social security, Tommy, from 62 to 70, hypothetically, maybe that’s the window. Maybe all of a sudden, now we have this awesome 12% tax bracket. That’s where we wanna do the conversions. But I’ll take a step back for a second and also say that we work with private sector clients, too, who, when you just have two social security checks in an IRA, some of that IRA is already coming out tax-free. So for private sector, your IRA could already be a Roth in some circumstances.
And then for federal employees converting when you’re a GS 14, 15 SES or in your highest earning years and not waiting for the phenomenal tax planning window. And I’ll get off my soapbox in a second. I’ve seen so much content on YouTube recently about why it makes sense to claim Social Security at 62.
The discount rate’s been wrong, the break-even period is X. Well, they’re not talking about by delaying social security, what other tax planning opportunities that that provides to you and your family? They’re looking at social security in a silo and they’re not thinking about, well, number one, you don’t have to live on less. Just because you’re delaying social security doesn’t mean you have a lower quality of life. And number two, what other strategic and tactical things are we able to do during this phenomenal planning window that the social media planners just blew up because they told everybody to turn on social security immediately? So, rant done.
Tommy Blackburn: That’s not done. Maybe that topic for the second is done. Completely agree. Theme there is we see the research and we keep an open mind to it and constantly wanna improve ourselves. But we do question many times like, is this analysis complete? And certainly, is it customized to the individual?
It’s like the water cooler financial planners that they’re not talking to you, they’re talking in these vague concepts or these big picture things that it doesn’t apply to you individually. It all needs to be customized to you individually, and a real thoughtful analysis of how one action ripples across many different areas of your financial plan.
So that’s a piece of this soapbox, reasons for the Roth conversion as I think about it, so you mentioned the private sector being in the low tax bracket, and it could even be a federal, it just depends on the situation. Still, if we see that, hey, we’re in the 10% bracket, potentially, maybe even at 12. If we can show that it doesn’t hurt you to do a Roth conversion right now, even if it’s a small one.
It’s like, why not? Because this gives us flexibility in the future, because you’re probably skimming right around the edge of, “Hey, in the future if the roof broke and we had to take an IRA distribution,” or the RMDs just really compounded on you. All of a sudden, your tax situation gets nasty because Social Security all of a sudden begin, you hit the torpedo and that begins becoming taxable.
And it’s not at the 22% rate like you–or the 12% like you think IRMAA could come in. So there’s like all these things that could happen where it’s, if we have a window right now, let’s take it. And talking about, I thought about another client that’s kind of the opposite of that, and how we just don’t know what the future holds. He was an executive at a company doing great, decided to take a change of course in life. And it is crazy. I told John this story, I may have even shared it on the podcast, to think like we went from pretty much the highest tax brackets out there and like, let’s defer as much as we can.
Let’s hide as much money from tax today that we can legally through retirement plans, et cetera. That was the theme, and then all of a sudden it was like, I can’t believe it, but this year, you’re in this great tax situation, so we need to actually create some taxes this year. Let’s do some conversions.
And it could flip-flop every year, just depending on what goes on in their life. So that’s, hopefully, just illustrates customized planning. I’ll try to stop in a second. I’m just trying to hit some thoughts ’cause you put a lot of good information out there. So it got my mind going. When we think about beneficiaries, that’s huge. It’s hard to know necessarily what somebody’s life’s gonna be, even the beneficiaries, right? ‘Cause they could have it together today, not together tomorrow. They could be early on in their career, getting ready, and it could ramp up later. You just never know. So even trying to peg their tax bracket’s hard.
All these people who make these absolute statements, though, it’s like I can’t imagine that you’ve actually thought through all of these variables and that you can be so confident to not have some humility in this analysis. I think about these are good reasons to do Roth conversions many times, or potentially maybe not, if the beneficiaries in a lower bracket to leave it to them.
What’s our crystal ball? Another is trust. So John and I went on a rant about estate planning and trust recently. Sometimes they make sense and what I’m thinking about here, this is complicated. You could have a disabled beneficiary and so on the one hand we can stretch over their lifetime now, so we don’t necessarily have this 10-year window that they have to empty the IRA out and have those tax consequences, but we also can’t trust them, right? They can’t make–that we have to have it inside of this trust, which to the extent it doesn’t push the money out to the beneficiary, which you don’t wanna do, ’cause you don’t, they can’t manage it. All of a sudden, this trust is gonna be taxed at very high rates, even as it’s accepting these RMDs, depending on what all’s going into there.
This is reasons for Roth conversions, because maybe we still gotta have RMDs from an inherited Roth, but it’s not a taxable distribution to the trust. So I hope we really believe, still believe that Roth conversions can make sense. And there’s another scenario, I think it’s overlooked. We talked about, I really want to get to, but hopefully the purpose, what I’m really trying to hit on is it’s really gotta be customized to you.
And there’s a lot that should be thought about here. We do it all the time, so we’re able to do it somewhat reflexively or go through it fairly quick for clients, but you see these things in the media, like you said, John, the social media planners. It’s like, this is very little thought. I think comprehensive thought has actually been put into this.
John Mason: Well, we say it all the time that we’re financial planners first, and we do this second, and I guess we’re kind of social media planners too, but we actually do run a practice and help real clients every day, which I think makes us a little bit different than some of the other content creators out there.
And so Tommy, hopefully, the audience doesn’t think that I’m bashing Roth conversions because I do think like you and globally as a firm, we believe that they can make sense. I’ll just echo my concern one more time that I just am worried that people are making decisions without being fully informed and we want you to pay the taxes that you owe the IRS; we just don’t need you to leave a tip. And I think that like anything, this end plan conversion opportunity is going to result in additional taxes that didn’t need to be paid. Tipping the IRS when we shouldn’t have done that. I just think that it opens up a can of worms here and I think that the government has done a nice thing by delaying RMDs until 75. When we started our career, it was 70 and a half, then it was 72, then it was 73. Now, whatever birthday, it becomes 75. What they’ve done for us is they’ve expanded that tax planning window, but many federal employees out there are thinking, “I’m not gonna touch my investments until I need to at 75 years old.”
Well, they need to go back and listen to the money muscles. They need to go back to activate your millionaire powers. And then they need to think about, okay, while I have this awesome tax planning window, what’s gonna happen at 75 if I’m not careful? And I’m already looking down to see some things too is inheritance, so 70, 75 years old RMDs are kicking in. Then you inherit a million-dollar IRA from your parents and it’s like it can get nasty quick. So again, thinking about these RMDs, bringing some of that tax forward. Here’s a big thing, I met with a client yesterday, Tommy, who recently lost her spouse and in the year you lose your spouse, you get to be married filing jointly.
So if we want to be just completely insensitive to emotions behind losing a spouse, from a tax planning perspective losing a spouse in January gives you the maximum tax planning ability because they would’ve had less months of pension, less months of social security, lower income, and you would’ve had more opportunity for tax planning creativity in a married filing jointly bracket scenario with a single person’s income. Go ahead.
Tommy Blackburn: That and that is the scenario that I wanted to, I felt like we needed to get to, and I’m happy we’re there. I am going back to what you said earlier. Yeah, we’re trying to balance that Roth conversions can make sense, but also it’s a tool, in-plan conversions of a TSP are a tool.
It’s not advice, it’s not anything special. This is just another tool for us to evaluate whether it makes sense in the context of your plan. This one, many people overlooked this, right? That year of death, like you say, we have to be sensitive. We need to understand grieving and more important things happening in life.
But from a tax perspective, that’s our final year of married filing jointly, unless there’s some other special circumstance out there. But generally, married filing jointly still exists. And guess what? After that, we go to single. So our tax brackets more or less are gonna get cut in half. RMDs are not gonna change.
We’re not gonna change much, is pretty much. So what was gonna be the required distribution hitting a married filing joint tax bracket, 80,000 in your one example? Well, all of a sudden it just got doubled. Pretty much, right? ‘Cause our brackets got cut in half. So this is too where we think we’re pro Roth conversion. We’re not pro Roth conversion. Like it all just depends. But this is one of those flexibility is one of those things that’s maybe missed, right? Where, hey, at the end of the plan, like many people’s projections are looking married, filing joint forever, right? But did we think about what if an unexpected death happens, or at the end of the plan, all of a sudden, all of this income could still be hitting and our tax brackets got cut in half.
So that final year, to your point, John, maybe that’s a chance, an opportunity to take advantage before we know our brackets are gonna get cut in half and then this is really a reason that Roth conversions, you know, maybe they don’t hurt you, but they could help you as we’re looking at it, where it’s like, we just don’t know. And if we get into going to single brackets, all of a sudden, having Roth money doing these conversions now while you’re in those double brackets, that was certainly beneficial to you.
John Mason: So this particular client who lost her spouse, lost their spouse earlier this year, we did a 65,000 Roth conversion and looked at the effective tax rate, and it was, it made sense to do that for this year. It’s also interesting because you think you know a client really well and for 10 years we’ve been working together and we’ve been carrying this life insurance and we knew that spouse was going to die first because there was an age difference between the two. So you play the odds that person was probably going to pass away first. I guess I’ll take a step back and say if there’s a 70-year-old and a 50-year-old, and the 70-year-old has all the IRAs. It could make a big difference doing those Roth conversions if you know you’re gonna have that single spouse living for three, four, or five decades. So just think about that.
An age difference can make a pretty big impact on the plan, too. But anyhow, this lady or this client had also mentioned that when the inevitable happened, the first thing that they were gonna do was pay off the house. And all of a sudden, the life insurance proceeds came in and I said, “For years, are you sure you wanna pay off a two or 3% mortgage when the life insurance kicks in?”
“Yes, yes, yes. That’s what I wanna do.” Life insurance money came in and what do you think the person said, “I don’t know why I would take this great money and pay off that 2% mortgage.” And it’s like, okay, like clients, you do this to us. Unintentionally, you kind of give us misinformation.
Maybe you don’t lie. Maybe that’s a strong word. But literally for 10 years, they told me they were gonna pay off the mortgage at this person’s death with the life insurance proceeds. The inevitable happened and the first thing was, “We’re not gonna pay off the mortgage.” Which was cool, because now we’re using that life insurance proceeds to pay taxes on the conversion.
So I’ll make up some brackets, Tommy, but the RMD isn’t cut in half, but the tax brackets are. So when I look at this client’s tax projection next year, if we’re not careful, we have about 10 or 15,000 that we can pull out at a reasonable tax rate, combined state and federal, maybe 20 to 25%, whatever it is, pretty low.
Well, then all of a sudden, if you push past that, you start losing the age 65 deduction in Virginia, you start losing the enhanced senior deduction, social security tax torpedoes kicking your butt. There was a 34% of marginal tax rate on some of this lady’s IRA distributions if we pull out too much next year.
And that is why we did a big conversion this year. That’s why we’ll do baby conversions next year, because we’re gonna take advantage of that 10 to 15,000 every year before that big spike comes up. So yes, the year of death is very important. And audience, hopefully you understand that we’re being very sincere and that we care about our clients, but we also do understand this once-in-a-lifetime kind of opportunity to make a pretty drastic move in your tax plan. So, it’s a hard conversation that we have to have, unfortunately, a couple times a year. I think one other point, Tommy, I wanted to hit on Roth conversions is sometimes people think about them as like they think about a 60-40 portfolio.
60 stock, 40 bond. And they think, “Well, where I need to get to is a 50% IRA, 50% Roth IRA balance.” Or they think I need to be a hundred percent Roth. Well, at the end of the day, there is no fixed allocation percentage between pre-tax and Roth assets that make sense. The underlying recommendation of how much you should have in each asset, one, can be opportunistic conversions. And then also it’s based on all those variables we talked about. Like, so for us, for example, let’s assume that, or let’s assume anybody for that matter, is in a 24% or 28%, a 32% tax bracket. They’re a business owner and life throws them a curveball, and all of a sudden they’ve dropped two or three tax brackets.
Well, that’s an opportunity. That’s an opportunity because if you, as a business owner, believe that your brackets are going back up in the future, well, that’s an opportunity where we can do a conversion. The reverse of that would be if you just inherited an IRA, Tommy, and you have to have a hundred thousand dollars distributed every year, probably not the year you wanna do Roth conversions on top of that, right?
Tommy Blackburn: Probably not. Yeah, well, certainly situational, but probably not. And typically, yeah, it just depends on what we’ve inherited there. A lot of times, what we’ll do is you can’t convert an inherited IRA. So in your example, yes, probably just not gonna do Roth conversions because we’re gonna get pummeled from a tax bracket, long-term planning perspective.
But many times the number’s smaller, that we have to do. We can’t convert the inherited IRA to a Roth IRA, so we have to manage this inherited, the RMDs, making sure we get it down to zero within the 10 years. But you also have an IRA, so we can convert that, use the inherited to pay the tax. So again, a lot of creative thoughts are just ways to kind of zoom out, assess the situation, put all the pieces together.
The answer can always vary depending on what we’re dealing with here. This is making me think too about some recent research or article that came out that seemed that in an absolute sense, say, you should do Roth conversions and you should do it all at once. And no, it raised eyebrows in our firm. And hopefully, as we go, everything you’ve heard us say is why it’s like, it just, it can’t be that simple.
I find it very hard. It has to have been an analysis done in a vacuum with quite honestly questionable assumptions. Being able to spread this out over time, and we deal with the situations, the changes that come in life and law and finance, that to us is usually the right, we’re not saying we would never do all at once Roth conversion, but that’s probably gonna be rare. That’s gonna be the exception. Typically, we do want to do these over years, bracket topping, as John mentioned earlier. One of the potential nice things about this is you also get to spread out the market conditions that you’re doing these Roth conversions at.
You would, ideally, you would like to do your Roth conversions when the market is down. That’s pretty hard though to pull this all off. When chaos is happening, get your timing right, get your tax projection done, like get everything signed and get it in. So don’t let perfect get in the way of good enough.
But the nice thing if you spread it out over years, because you’re basically DCA-ing your Roth conversions, so that, you know, the market’s down one year, you got to get more essentially, right? So if you think about, if you were to say the value of a company went down, well, now you got to move it over, your tax was less. If you just move the shares over as hopefully, like a decent example there.
So that was advantageous, ’cause you can move more shares into the Roth that then would grow. Over time, we expect the market to go up. So you could make an argument that, hey, you’re gonna be doing these Roth conversions at higher and higher prices. But we don’t know. And there’s many reasons from controlling our tax brackets, controlling IRMAA, controlling for various things as to why spreading these out over time.
It’s also odd ’cause we see many, many client situations where it’s like they never were gonna get into a 30-some percent bracket. Unless there was something weird going on in their tax return, like these phase-outs, it’s like, but if we did it all at once, we certainly were gonna do that. Why we wouldn’t spread it out over the 22% using the rules we know today, so sometimes, to your point, John, we take issue with some things, we see question, you know, what’s this done in a vacuum? What were the assumptions? Again, big takeaway from us here is customized to you.
John Mason: Well, and I want to close that thought for a second with saying that Roth conversions make sense all the way to the point where they don’t make sense anymore because one of the variables is age and life expectancy. So, you know, as you think about that in your financial plan is maybe you do Roth conversions with Tommy from 60 to 70, and all of a sudden at 70, Tommy says, “Well, yeah, now you’re doing QCDs. Your RMDs are relatively low. The tax brackets changed. We don’t need to do these anymore.”
Or we’ll do them like as needed, but it is completely, it’s not like when we say do Roth conversions, that it’s a locked-in stone 30-year plan that we have to do the same amount every year. I’ve had a few clients this year tell me where we’ve like reached a point of we’re good, RMDs are manageable, tax bracket’s great. We’re not hitting any thresholds and we’re not in really any danger of–and spending goals have maybe ramped up, so they’re spending it. So yes, just understand that it can make sense at some point, and then also at some point in the future, it may make sense to stop them. There are two Roth conversions that make sense for everybody all the time. Do you know which ones they are?
Tommy Blackburn: Broad conversions that make sense all the time. My guess is we,
John Mason: Assuming certain criteria is met, of course. So all the time under the right assumptions.
Tommy Blackburn: Right. Yeah. Well, for sure. My guess would be off the cuff, without game planning, what you’re thinking here is when we can do them at 0% at zero tax. So if we don’t have enough taxable income that with a standard deduction, et cetera, we can do them more. We have that loss situation. You said a business owner drops down. Hard to see where that doesn’t always make sense to take advantage of. We can do a Roth conversion when it costs us nothing. Don’t ever know where that would hurt us.
John Mason: Yeah. Zero taxable income’s not good. We probably wanna always have something. I was actually thinking backdoor Roth contribution conversion done correctly, that makes sense for everybody. And the mega backdoor Roth makes sense for everybody, assuming you’re not running afoul of any of the things that we need to not run afoul of.
Those are two that we would say emphatically, if you follow the rules appropriately, those are things that were just it’s kind of a trick, right? We’re getting more money into a fraud through this awesome kind of loophole. And yes, it makes sense all the time, assuming you don’t have IRS 8606 issues, aggregation issues, what have you.
Tommy Blackburn: I love it. Yes, you are correct. And I’m happy that we’re both kind of trying to put out some caveats or say that this is generalizations. There’s always exceptions, ’cause I had even jotted down earlier, I know I said 59 and a half early distribution. That’s general. You could make the point to us of saying that, “Hey, if I’m over 55 and separated from service, that TSP,” or which you can’t have it withheld under the current rules, but you know, if I had it withheld there, it’s not an early–like yes, there’s always caveats and I guess maybe we’re a little sensitive at the moment because we got the one comment that kind of wanted to say we had no credibility where it’s we’re trying to get the points across conceptually, generally as best we can here. There’s always exceptions, there’s always customization, so please give us the benefit of the doubt here when we’re speaking. We realize that there is always going to be some special circumstances here to account for, or that we may misspeak. It’s a general, no mistake. We aim to not misspeak, but it does happen occasionally.
John Mason: I guess my last thought on this, Tommy, before we wrap is, again, remember the two questions were A, do they make sense over your lifetime? And then B, when do they make sense? And a good financial planner that’s doing tax planning, remember, you don’t have a financial plan unless you have a tax plan. We work really hard with our clients across the country in many states other than Virginia, understanding Virginia tax law, California, New York, New Jersey, Florida, Texas, wherever. Well, there could be an interesting opportunity where you, if you know you’re gonna retire to Florida, why are we doing conversions when you’re in Virginia?
Why are we paying an extra 6%, 5.75% Virginia tax, losing an age deduction, blah, blah, blah, blah, blah, when two years from now you’re gonna be in Florida and we don’t have any of that anymore? So yes, do they make sense over your lifetime? If so, when do they make sense? And then if you think about, you know, some states don’t even tax IRA distributions at all.
So there are states like Florida that don’t have income tax, but like Pennsylvania for example, doesn’t tax, I think I’m like 99%, they don’t tax IRA distributions in Pennsylvania, they also don’t tax social security. So Virginia doesn’t tax Social Security. North Carolina doesn’t tax CSRS pension and other bail act provisions.
So again, conversions in our highest earning years, where all of a sudden you find yourself in retirement, probably more wealthy than you were before, probably with more disposable income than you’ve ever had, and probably–
Tommy Blackburn: And more control.
John Mason: More control and maybe more income, more net income and the lowest brackets, and then you factor in the state component too, not just federal, long story short.
Tommy Blackburn: I love it. And it reminds me of looking at a projection recently with another client as we’re doing end of year and looking at Roth conversions, or I say end of year, back half of the year. And client’s fairly educated, but you know, sometimes you know enough to be dangerous.
And so we’re going through this and they’re thinking like, “I gotta get these Roth conversions in before I turn my social security on,” and we’re delaying the 70, which is like, yes, I, conceptually agree with this, and I’m looking at the long-term conversion and our long-term projection plan, and some of this I think is a benefit of doing this routinely and having experience, being able to put the pieces together quickly as the client was collaborating but throwing me some curve balls as we’re thinking.
‘Cause I’m thinking we got longer than Social Security, but you are correct. Social Security comes in. But the issue was, as John said earlier, when we take your social security, doesn’t impact your standard of life, right? So what have we been doing? We’ve been taking IRA distributions. When social security comes in, it just means we’re dialing the IRA distributions.
So that should actually be a wash, except as I was looking and thinking, only 85% of Social Security is taxable. So actually, client, at age 70, your bracket’s gonna get a little bit bigger because social security’s gonna be taxed more favorably than these IRA. Now this all depends, right? Client could not be taking IRA distributions and all of a sudden, Social Security comes in.
That changes that math. But in this situation, it was interesting to see that like actually, the window’s still gonna be there until required minimum distributions come in. Because then that’s gonna come in on top of Social Security. And to John’s point, it got better for Virginia, too, because it’s not taxed in Virginia.
So these are fun things and the nuance, we say fun to us and just nuances and why I keep coming back. I keep saying it, customized to you and can’t put a discount on flexibility if it doesn’t hurt you, the flexibility that you gain from having a tax-free tool in the future is tremendous.
John Mason: Folks, be careful. Roth conversions, in-plan conversions. They sound wonderful. Be careful. We can’t help everybody. We don’t wanna help everybody. We’d love to help you if you wanna become a client of Mason & Associates, but there’s other great financial planners out there too. Please, please, please, please, before you start embarking on Roth conversions, pay for some advice, get a second opinion.
Don’t leave a gigantic tip to the IRS because you’re too cheap to hire a financial planner to give you a second opinion before you embark on potentially one of the biggest mistakes you could make in your entire life, which is converting things and paying additional taxes that you don’t need to. Your tax bill is one of your biggest bills in retirement, if not your largest bill in retirement, paying a financial planner to help guide you through that, you know, we’re hoping for ongoing relationships. There’s other people out there that do one-time plans, just get some advice. It’s worth a couple thousand dollars to have a gut check on this before you start converting five, six, 700,000 plus from IRA to Roth. So be safe out there. Be careful out there.
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