Tax-Smart Retirement Planning: Insights on Roth Conversions

For those looking to optimize their long-term wealth preservation and succession planning, strategic Roth conversions may be the answer you are searching for.

In this week’s episode of Retire in Texas, Darryl Lyons is joined by PAX’s very own advisor, Roger Stukkie. Together, the duo provides valuable insights into Roth conversions, expanding on the potential benefits, risks, and strategic considerations, while also expressing the importance of seeking individualized financial advice.

Show highlights include:

*A discussion of the concept of Roth conversions and how they differ from traditional IRAs in terms of taxation.

*The potential benefits and risks associated with Roth conversions.

*A breakdown of a case study illustrating the strategic planning involved in Roth conversions.

*An explanation of why Roth conversions may not be suitable for everyone.

If you enjoyed today’s episode, leave a comment, and share the show with a friend!


Thanks for tuning in to Retire in Texas. This is Darryl Lyons, CEO, and co-founder of PAX Financial Group. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, I’m going to have a guest today, Roger Stukkie is here. He’s a shareholder of PAX, so he is certainly somebody that’s going to be here for a long time and an advisor that just does an exceptional job.

He’s the only kingdom advisor in our office and what’s cool is, Roger, this is your second time being here, right? 

Roger: It is. 

Darryl: Yeah. So that’s interesting because we have a lot of advisors and you’re the one that says, I’ll do it. So welcome back.

Roger: Thank you, good to be here. 

Darryl: So, I asked a lot of the advisors. I said, hey, who wants to talk Roth conversions on Retire in Texas?

And I asked in a Zoom meeting, and it was kind of quiet and then Roger said, I’ll do it. I talk about that enough. I feel good. So, I’m happy you came to talk about Roth conversions today. Please, if you’re listening. You’re like, oh man. Roth conversions. That’s not like entertaining to me. I know, but I’ll try my best and Roger will, too. I’m going to have you tell us a joke to start out. 

Roger: Sure. 

Darryl: I’m kidding. I’m kidding. I’m putting you on the spot. 

Roger: It’s funny, I brought one this time because last time I wasn’t ready. 

Darryl: You did? All right, let’s do it. Okay. Give me a joke. 

Roger: Simple one I heard was guys talking to God. And he says, God, how long is a million years to you? And he says, About a second. And he goes, well, how much is a million dollars to you? And he says, It’s about a penny. He goes, well, if you don’t mind, could I have a penny? God says, No problem. Give me a second. 

Darryl: That a good financial one, too, especially because PAX kind of integrates faith and finance. I think we’re going to recycle that one. 

Roger: Well, if you try to separate God and money, you’re messing up right there. So. 

Darryl: That’s right. Yes, exactly or two thousand scriptures. But let’s jump into it. So, I have seven questions for the listeners here, but I don’t know if we’ll get to all of them that are in front of me.

Before, let’s lay the groundwork. There’s Roth IRA, which IRA is not individual retirement account, a lot of people think that. It’s an individual retirement arrangement, but there’s traditional IRAs and then there’s the Roth. Roth, another little factoid was a senator from Delaware, his last name was Roth in about 1994, came up with this thing. So, it has been around in perpetuity.

It’s, you know, thirty years now or whatever. Forty years. Goodness. 1994 or 2020. Yeah, it’s been thirty years. I had to get that right in my head. 

Roger: I wanted to help, but you had to get there on your own. 

Darryl: Thank you. So, Roth IRA is different from a traditional IRA. In what ways? 

Roger: Really comes down to taxes. A Roth IRA is funded with after tax dollars, meaning there’s no tax benefit today. Whereas a traditional IRA is funded with pretax dollars. So, you actually get a reduction in your taxable income today. 

And then when you pull it out down the road.

Roger: Then it flip flops. So, Roth IRA will actually allow you to take all of the earnings out tax free, assuming you’re over fifty, not have five years and specifications and a traditional IRA a hundred percent of it as taxable, as ordinary income.

Darryl: And that’s the problem that we’re going to solve in this short time together, is a lot of people who have a bunch of money in traditional IRAs might have a ticking time bomb down the road because if tax rates go up, the government’s kind of twiddling their fingers saying, I can’t wait to tap into that because it’s a revenue source.

And I promise you, I’ve read enough of this that the government is looking at all traditional IRAs out there and going, I cannot wait to get access to that money there. They are licking their chops. And so, we want to kind of strategize. We have to pay Uncle Sam, but we don’t have to leave a tip.

So, tell me a little bit more about those threats that might exist in the future, for those that haven’t deeply considered a Roth IRA. 

Roger: I think the biggest threat is the difference between those two is the taxes. You know, short term, maybe you guys have heard of Sunset. It’s coming up in the end of 25 or the start of 2026.

We revert back to some old tax laws. It simply means all of the brackets are increasing. 

Darryl: Not just a little bit, a lot. 

Roger: They could four or five percent per bracket. 

Darryl: Yeah, I mean, that’s real money. 

Darryl: That’s just in the short run. But then you look at things too, like, you know, the U.S. debt, I think as of yesterday it was like thirty four point four trillion. 

Darryl: Crazy.

Roger: That has to be taken care of in some format and one of the greatest sources of income is taxes. So, yeah. 

Darryl: They’re salivating, man. They are salivating over traditional IRA. So, the traditional IRA is the reason that this is interesting is because, yeah, you’re like, okay, I pay taxes when I pull it out, then I just will, you know, I’ll just not pull it out. But there’s something called an R&D. Can you tell people what that is? 

Roger: Yeah, the required minimum distribution, you know, going back to the where they’re salivating and waiting for your money. 

Darryl: Yeah. 

Roger: You reach an age which is different depending on what year you were born. But we’ll say roughly seventy-two. 

Darryl: Used to be easier, right? 

Roger: They’ve changed it three times in the last couple of years. But it is okay, we’ve waited long enough. Now you have to take money out of your IRA, rather you needed it or not. 

Darryl: Yeah. 

Roger: And as we said earlier, you know, when you pull money out of an IRA, that changes your taxable income. 

Darryl: So, we talk sometimes about the ghost of Christmas future. And there’s also in our future a need for good health care, and that’s called Medicare. 

Medicare can be free, but sometimes it’s not. So, you pay some Medicare surcharge premiums. So, this is where like smart like I’m kind of being slow with everyone here because I want you to put two financial thoughts together. You’ve got this Medicare potential premium down the road that you may have to pay.

How? I’m asking the audience, how is that connected to this Roth IRA? And Roger, I’d like for you to kind of help bridge that gap in those two financial thoughts. Can you do that? 

Roger: Yeah. So, when you’re looking at Medicare, the premiums that you pay are influenced by the taxable income that’s coming on the door to you. 

Darryl: Well said.

Roger: There’s a two-year lag on when those take effect. Simply meaning, whatever your 2024 income is right now will impact your 2026 premiums. And those brackets do not line up exactly with income tax brackets. So, it creates two different dynamics that we have to pay attention to when we are creating more taxable income through the conversion process.

But it’s a thing called IRMAA. 

Darryl: Yeah, IRMAA. 

Roger: I-R-M-A-A. Which is, you know, fine education, its income related monthly adjustment amounts. So, I’m glad they reduced it to an acronym. 

Darryl: It’s a mouthful. 

Roger: So, you could be doing conversions to save taxes and then be unaware two years later, all of a sudden, you’re paying one, two, three hundred more per month on your Medicare premiums.

Darryl: So that’s why I want to double click on for a second. So just I want to give people a big picture. Your future health care costs can be more than they should be if you haven’t done some proper planning. That’s what I’m trying to get at. So, let’s say in an ideal scenario, all of your income is from Roth IRAs, which is tax free, no required minimum distributions.

Then you’re like your tax return is really favorable and you don’t have to pay Medicare premiums or very little maybe. And you’re like, this is great. But that’s not the reality of most people. And so, most people have kind of a combination of buckets. And again, remember, like I said, the Roth IRA hasn’t been about around in perpetuity.

So, most people have big chunks of these traditional IRAs and the 410 (k)’s. You mentioned a word that we haven’t got to yet, and that’s conversion. So, the reason I want to set it up. This is very important for everyone listening. It very important to think about. Very important. I can’t stress it enough.

There is an opportunity now to convert from traditional IRAs to Roth IRAs. Can you talk a little bit about how that works? 

Roger: Yeah, I can. And I think just a put a pin on one more point of what we were saying. If we don’t consider conversions and all of your money stays in an IRA or a pretax vehicle, when you get to that required minimum distribution age, whether you wanted the money or not, you have to take it.

And sometimes the amount that’s required to take out will influence your premiums on Medicare as well. So that’s why the conversation is important, because even things we don’t choose might influence what we have to do. 

Darryl: And you mentioned Medicare a couple times. I think that’s just really good. I do want to let all the listeners know for PAX clients only, we don’t do this for everyone, but for PAX clients, we do Medicare planning. 

And so, we’re able to work with our Medicare expert and kind of navigate through that. Some of the clients that are listening don’t know that we do that, and they go elsewhere, but we do that for our clients only. So now, talk a little bit about conversions.

Roger: Yeah, so the conversion process is simply taking money from an IRA and moving it over into a Roth IRA and the amount of money that you would move over, you would pay ordinary income taxes on in that conversion. But from there on out, all of that money, that move now begins to grow tax free and is available for you to take out without taxes in the future.

Darryl: That makes perfect sense. You said it very well. You know, I made mistakes on converting Roths. You know, I’ve been doing it for years. And I remember making a mistake once. I did something called a backdoor Roth. And I didn’t do it the right way. It was early in the conversion world, to my defense, it was everyone was just now starting to do these backdoor Roths and there was still not a lot of maybe there was a lot of rules and I fumbled in the client paid more in taxes and they’re still with me today.

I’m sorry, it just happened. But you learn from those mistakes as financial advisors. Fortunately, there weren’t a lot of zeros on it, so it wasn’t like a huge material issue. But can you talk about maybe some of the mistakes that are made when people are changing from a traditional to a Roth, also known as converting from a traditional to a Roth?

Roger: Yeah. So, I mean, one I can talk specifically to the backdoor Roth that you just mentioned. A backdoor Roth is a tool we might use when your income is too high to be able to contribute directly into a Roth and or make tax deductible contributions to an IRA. Which often will come inside because you have a retirement plan, you’re participating in at work or something. 

Darryl: Makes sense.

Roger: So, you make a non-tax deductible contribution to an IRA and then you immediately would turn around and you convert it into the Roth. You’re like, If I’m not going to get tax benefits on my contribution, let me at least get it into a bucket where it grows tax free as well. Where the mistake happens is that only works seamlessly if there are no other traditional or any IRA assets.

And if there are IRA assets, the conversion ends up being prorated and so you end up creating a tax liability that you weren’t aware of. 

Darryl: Yeah, don’t do that. Yeah. So, lesson learned. 

Roger: So that’s the big one with the backdoor. If you’re looking at just Roth conversions in general, some of the things are, you know, not paying attention to tax brackets.

Darryl: That’s huge actually. Yeah. That and that’s where I think good planning works is like you’re looking at those tax brackets. 

Roger: You know, if we’re floating in the twenty-two percent bracket, twenty-four is not that much higher. That gives us a lot of room to play with. But if you missed something and you jump into a thirty-two percent bracket, we’ve just paid eight percent more taxes and we don’t need to.

So, paying attention to those you know, we’ve talked about IRMAA. The bracket changes and when you start paying a surplus on Medicare premiums, if you’re not paying attention to that, we might accidentally increase those. 

Darryl: That’s good. Yeah, that’s really good. That’s a big mistake there, too. 

Roger: There’s another like you might know in general, Roth IRAs have two rules in order to benefit from tax-free earnings. You have to have it for at least five years, and you have to be over the age of fifty-nine and a half or older. 

Darryl: Yep. 

Roger: What happens in a conversion is if you are under fifty-nine and a half, a conversion gets its own five-year timeline. Whether or not you’ve had any other Roth set up.

And a lot of times when we’re doing conversions, we look at can we pay the taxes outside of the account or do we need to use money from the account? Well, a conversion is you know, you just pay regular income taxes there. But if you pay the taxes out of that and you’re under fifty-nine and a half, you’ve ended up in a space where you’ve taken an early withdrawal that comes with a ten percent tax penalty.

So, yeah, you know, depending on how much you’re converting, that can equate to some serious dollars. 

Darryl: Now that’s really good stuff. Now let’s go nerdy for just a second. And I don’t like to for those that know me, the framework of this podcast is I try to keep things in a relatable format, and the only way to do that is to not use a lot of numbers.

So that’s why a lot of people tell me, Darryl, thank you so much for dumbing this down for me. And that’s not my intent. I just want to use a lot of numbers because I just know how it confuses, especially on air. But I’m going to just hang with me for saying because I’m going to go to a little numbers with Roger here.

Can you give me an example? I asked him to bring an example and share that. 

Roger: Which I was grateful because when you first told me, let’s talk all this numbers without numbers. Yeah, I was like, you know, asking a financial advisor to talk on a topic without numbers is like asking a pastor to preach without verses. I go, how do we do that?

Darryl: Yeah, exactly right. 

Roger: So, I do have just one example. The couple had a million dollars in IRAs and they retired right around sixty-five. 

Darryl: Okay. 

Roger: The income bracket that they were in was twenty-two percent. So, we had a lot of leeway to utilize the twenty-four percent bracket as well. Knowingly that we were going to push into a couple of the Medicare brackets, and we were going to increase premiums for a few years with the strategy.

But there’s two things why you might do conversions when you’re considering it. One is the tax benefit to you, but the other could be the tax benefit to your future heirs. 

Darryl: That’s a very important point. We won’t be able to cover that today, but very important point. 

Roger: In this case was beneficial to the latter. 

Darryl: Okay. 

Roger: So, they had built up enough fixed income sources where all of their assets were more of a surplus than a necessity.

So, when we started a conversion plan, we were able to convert a hundred fifty thousand a year, which did put it in the twenty-four percent bracket. But the thought process was this money is for the future generation. So, we withheld taxes out of the conversion and a way to allow them to pay the taxes ahead of time at a lower bracket. 

Darryl: That’s really smart.

And so, in eight years we had all million dollars plus the earnings converted, which happened to come right alongside of when their RMDs were starting. 

Darryl: Sweet. That’s great. 

Roger: Yes. So now we no longer have forced distributions, and the assets continue to grow. And you know, as you push that out ten years, you know. Take a million and just make math easy, we took out two hundred and forty thousand for taxes and you had about seven hundred and fifty thousand or seven hundred and sixty thousand.

Yeah, exactly. Because we’re getting fact checked and, you know, just double that over the next ten years when we say we’re at one and a half million or both kids that were in line to get the money are in a thirty-two percent bracket because they’re high earners. Had that passed to them as a traditional IRA at a thirty-two percent tax bracket, they would have paid four hundred and eighty thousand dollars in taxes.

Darryl: Oh my gosh. 

Roger: Because we were able to allow them to take taxes out of the conversions at the parent’s lower tax bracket. We saved over two hundred and forty thousand dollars in taxes on the amount of money that got to pass on that. 

Darryl: It’s absolutely brilliant and I think good long-term planning does that. Just constantly engaging with the advisor to kind of strategize these kinds of things.

And there’s the quantitative side which you, you laid out perfect. It was really well done, the quantitative side. And then there’s the qualitative side where I know the PAX Advisor, which kind of makes us unique is we’re going to talk about, hey, we’re going to give these kids a lot of money. Do we want to make them waiters?

What I mean by that is waiting for mom and dad to die and then just take all the money. No, we want to we want to talk about do they have the wherewithal? Do they have the same value so that way they receive these proceeds that they’ll be good stewards of it. So that’s very important.

And I know that that dialog takes place all the time, but also the quantitative side, making sure that we reduce that taxable income. And we talk a lot about, and I know you talk about this not just this is a problem in the marketplace. The CPAs today will be focused on reducing taxable income today, maybe yesterday, last year, maybe the next year.

But we’ve really taken on this responsibility of doing long term tax planning, right? 

Roger: Yeah. I mean, when we say we do tax strategies, that the main goal is to reduce the amount of taxes that you pay long term. 

Darryl: Yeah.

Roger: And there’s different ways to get that, Roth conversions are a big one. We can’t really unpack the rest, but there’s qualified charitable distributions, donor advice funds, things like that.

Darryl: Yeah. 

Roger: One thing I do want to mention on the other side is a Roth conversion might not make sense for everybody. 

Darryl: Right.

Roger: Still an individual basis, like a ten second plug on one case where it didn’t, is a couple had no beneficiaries, they had no kids, so no one of person money was going to charitable inclined and over fifty percent of their money was geared to go to charities.

Well, they didn’t need assets along the way because of a good built a fixed incomes. So, to convert their money to Roth and pay taxes on something would have been a waste of money because that money was going to a 501C who wouldn’t have to pay taxes. 

Darryl: Yeah, that makes sense. Yeah. 

Roger: So, they’re just, you know, don’t just automatically assume that’s what’s best for me and move, that’s why we talk through things with every client and everybody’s unique. 

Darryl: Yeah, yeah, that’s true. It’s not a blanket prescription, so thank you. Hey, look, I know we went a little long winded, but there was a lot of content to cover here. I try to keep it fifteen minutes, but maximum twenty. And so thanks for tuning in. Thank you. Anything else you want to add before we go? 

Roger: You can get this under 15 if you can listen at a one and a half speed. 

Darryl: That is true. 

Roger: I like myself at one and a half, actually. That’s how I listen to it. 

Darryl: That’s how I listen to me too. All right. So, thanks again. I appreciate you coming in here very prepared and a great conversation in a short amount of time.

So, Roger Stukkie, thank you for being with us and thank you for tuning in to the very end. I always appreciate you subscribing and liking and then going to the PAX’s website if you haven’t already to have a fifteen-minute consult with one of our advisors who have hearts of a teacher. I encourage you to do that. It’s complimentary. And as always I remind you, you think different when you think long term. Have a great day.

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