Learn what you should be thinking about as the market drops for your railroad retirement. Welcome, everyone, to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara, Highball Advisors, and I'm filming this in June of 2022. Tough year for the market. Really hasn't been great. However, as I like to say, let's make lemonade out of lemons. We have opportunities here to really, really help your railroad retirement. For those approaching railroad retirement and in railroad retirement, this is some really great stuff that you can take advantage of here.
So what am I talking about? I'm talking about Roth conversions. Just to refresh everybody, what is a Roth conversion? It's taking your tax-deferred money in an IRA, you have to pay taxes on that when you take it out, and you pay that at ordinary income. They'll take it one way or another, they'll either take it or they'll force you with an RMD, but that's for later, and then moving it to a Roth IRA, which then becomes tax-free. So once you pay that tax, that's it.
So why would you do a Roth conversion? Here's the reasons. Because you're now in a lower tax bracket, because you're in retirement. When you were working, you were making a lot more money. Now you're in retirement, the taxes are lower. So now you can look to do a Roth conversion. Prepare for large purchases. So you're in retirement, maybe you want to go get another house or an RV, or even prepare for long-term care. If you take that out, money all at once, it gets taxed at ordinary income, could affect your Medicare premiums through IRMAA. So this kind of slow roll, as I like to say, through Roth conversions, that way you'll have that money in for large purchases. Estate playing, another great opportunity. Get all that money tax-free, pass it on to your heirs. Don't pass taxes on to your heirs, pass the money on to them. And then if you're concerned that taxes are going to get higher. Big concern, you can see it. Deficits, all those type of things, eventually they're going to come for money. Maybe they'll raise the taxes.
Those are some of the reasons why to do a Roth conversion, so now let's talk about how we should be thinking about it now with the market having dropped maybe 20, 30% for some. It's been bedlam the whole way. So let's just give this example I have here. Let's say Mike and Betty have a million dollars in their IRA, and like I say, you want to do it with the tax bracket. So they're going to convert $140,000 to stay inside that 24% tax bracket. They don't want to move up to that next tax bracket, but they're going to convert 140,000 of that one million. However, before they do it, the market has dropped, their account is down to $800,000. So they lost 20% of their account and now it's $800,000. All right, so now what they can do is convert that same amount, the $140,000, but look how much more they can convert now. 17.5% of their account is now going to get moved to tax-free. They're still going to have to pay the same taxes on it.
Now, what you have to assume when I do the on sale is that the market will eventually recover back these prices. That's very important. Obviously, you never know where the market's going to go, but if you just look over time, you say, "Hey, yeah, maybe this will get back to the original price." I don't know when. Six months, year, five years, 10 years, I don't know. But let's say it recovers back to the original price, and then let's look at the example that we have here. So we have, from the traditional IRA, the $800,000 balance, the $140,000 conversion amount we did, and then we have the market gain to get back to its original price, you need a 25% gain. When you have a 20% drop, you need 25% to get back to the original price.
Okay, now your IRA balance is $125,000. Okay, well, that's better than the 800,000, you're up 25,000 there. However, look, we've got 140,000 now tax-free in our Roth IRA, and we got the market recovery gains, so we have another 35,000 on top of that. Now we have $175,000 in the Roth, and that's all tax-free. So just by this market drop here, look at all this extra value that we're getting to convert over.
So, I don't know where the market's going, but I'm just saying here's opportunities. Instead of putting your head in the sand, so to speak, get proactive and look at these opportunities that are out here for you to do some Roth conversions. Very, very valuable stuff. Get that stuff to tax-free. I'm a big fan of that. Great, great way to build wealth. So, if you want to discuss this strategy, you're nearing retirement or in retirement, you want to go through this, reach out to me. I have a great Boarding for Railroad Retirement process. I go through the raw strategies with everyone who goes through that Boarding for Railroad Retirement process. Very, very valuable. So like I said, reach out to me. Click on the subscribe for the YouTube channel. We drop videos every once in a while. If you click on the bell, it will notify you when the new videos drop, which is great. And then share this with other railroaders. So until next time, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.