Today we're going to talk about the biggest mistakes people make with Roth conversions and how to avoid them. We're also going to talk about how Aunt Irma and Uncle Ronald, r m d, and our good old friend, uncle Sam, so stick around while we go through the nitty gritty of what you need to know before doing a Roth conversion.
What is a Roth conversion?
So a Roth conversion is essentially when we decide to pay taxes on our retirement accounts and choose when and how we pay taxes.Ordinarily, we would pay taxes when we take the money out of the account and we would take it, out in retirement. A Roth conversion is saying, Hey, I'm gonna pull out more money than I need. I am going to pay taxes on that immediately, and I'm going to put it in this Roth. Now the benefit of this Roth account is that it grows tax free, and when we take the money out, it's tax free on the distributions.Of course, there's an asterisk with that, that we'll talk about more about, but essentially that's what it is. It's paying taxes when it's convenient to you and not when it's convenient. In Congress,
What About IRMMA?
So I think that, these are nice hypothetical discussions and like lots of things in finance, we can get caught in the weeds.We can talk about, like what's theoretically the best decision to do, right? What's the best stock to buy? What's the best bond to buy? What's the best, R M D or Roth conversion? But at the end of the day, all of the hypothetical decisions and all the hypothetically best things to do really don't carry any water or hold any water when it comes to your retirement because this is your retirement we're talking about.We're talking about the money that you need to live on, the money that you need to count on. Then you need to be there for the rest of your life and your spouse's life and maybe even your children, right? So when we are talking about. What we need to look at is really, is it going to create the experience that we want to have?Is the decisions that we are making as converting, doing this Roth conversion? Is it going to help our retirement? Is it gonna make our money last longer? Is it gonna give us more income in retirement? Or is it gonna detract from that? Because at the end of the day, that is the only thing that.Not some theoretical decision of, will this theoretically save me money if I live to 120? Maybe theoretically, but I don't care about theory, I care about practice. And so that's really, when it comes down to it, I think that every single person, it has a unique decision, right? And how much to convert, if you should convert when you should.That is a uniquely personal decision, and I really, it really gets to me when he will make these blatant statements out there and they say, oh, everyone should convert. Everyone should do this. Everyone should do that. No, you are not everyone. You are a unique human being.
The Biggest Roth Conversion Mistake
I think probably the biggest mistake that I see people making, especially right now is to do these massive Roth conversions upfront. I, for some people I recommend Roth conversions for the vast majority of people.I actually show them that. Either doing a small conversion or not doing any conversion at all is beneficial for them, but I do tell them right the concerns that we have today about doing Roth conversions, like the fact that our tax code is scheduled to expire in 2026. The fact that every administration comes in and puts their stamp on the tax code, the fact that we have high inflation, the fact that we have, interest rates are rising, which means that the Federal deficit and the Federal Debt service cost is gonna go up, right?All of these are reasons why we should be concerned about taxes increasing. . But the thing that I also tell everyone is that you can bet that Congress is going to have a way to protect their money and that in the United States, the tax code is not set up to collect revenue. It's actually an extension of our economic policy.It is