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Should I Do Roth Conversions for Railroad Retirement

Video Retirement Financial Planning Taxes


Learn a strategy to build a tax-free railroad retirement.

Welcome everyone to another edition of the Highball Railroad Retirement Whiteboard.

My name is John McNamara of Highball Advisors, and what we're going to talk about today is Roth conversions, right? Maybe you've heard the term. So I'm going to walk through it, kind of the triggers that you want to learn to, if you should implement the strategy. And what is the strategy, right? You're trying to pay taxes upfront in order to accumulate money and have a tax-free railroad retirement. So I'll walk through the do's and don'ts, reasons why you should, and reasons why you shouldn't, right?

So what we're talking about is you've left the railroad, you have a 401k, and you want to convert that money into a Roth IRA. Pay taxes on it now, and then you'll have, all that money will be tax-free.

So let's go through it and see if this strategy works for you. Some people it does, some people it doesn't right? So reasons to convert your 401k into a Roth. Distributions can be tax free, right? That's what I was talking about before.

So once you do the distribution, you've paid the tax on it, that money is now tax-free for rest of your life, right? So pay taxes once, never again, that's what I'm saying. That one time, boom, right? So you know what the tax rate is, and you're all set.

Tax insurance, kind of the same thing, right? You know, listen, we know what the rates are now, today, okay? But we don't know what the rates are going to be in the future. We have an idea. Everybody's predicting they're going up. There's proposals to move the rates up, so we can lock in the rates now, okay?

This is kind of interesting, Roth's are invisible on your tax return, check out your 1040s, right? So if you have a Roth IRA, IRS doesn't know that you have a Roth IRA, so that's kind of interesting. Because when you do the, when you take it out of a 401k, right, you got to pay ordinary income tax that gets exposed to the IRS.

All right. And then no RMDs, right? So at 72 years old, you got to make your required minimum distribution at your tax deferred accounts, those are the RMDs. So you're getting, you're lowering the amount of RMDs that you're going to have to do, possibly down to zero by doing this Roth conversion strategy, right?

And then estate planning, which is also a little side benefit. That means, hey, I've paid the tax on it, I can pass this money onto my beneficiaries and they won't be taxed on it. So that's a nice estate planning tactic.

So reasons not to convert, right? There are reasons not to, right? You got pay the taxes up front, right? That kind of socks, right? So you got your lump sum out, you got to pay the taxes, right? Because the government gave you a tax break to start with your income tax, but now they want their money, so you've got to pay the taxes.

So that goes into where am I going to get that money from, right? You have to get it from maybe a taxable account, from your savings, that's important. Conversions can't be canceled. So once you've done the conversion, and let's say something big comes up, you can't cancel it, all right?

And then you have legislative risk with Congress, the government. What happens if they change the rules? I don't think they'll change the rules. I think they like Roth conversions because that makes money come into the treasury in the very short term. I don't think they really think long term. So I wouldn't put that one too high up there.

However, when you do the next one up, when you do the Roth conversions, you increase your AGI, right? And so what happens with that, that has a knock-on effect on your railroad retirement, if you're collecting railroad retirement, right? Because that amount becomes more taxable. Your Medicare, right? Those two years before Medicare starts and even into Medicare, if you're adjusted gross income goes up, then your [Irma 00:00:04:05] charges, right? So you might have to pay, that monthly Medicare tax would go up.

And then also the net investment income tax, 3.8%, depending on how much you do, another 3.8 percent, okay? And then don't do it if you need the money soon. Hey, I need the money. Well, no, you've got to wait, right? It's five years you've got to wait on the money.

And then also the medical expense deduction, that's kind of interesting. If you have a high medical year on your taxes, right, that's 7 1/2% tax write off on medical expenses based off your adjusted gross income. So if it goes up, if you're having a bigger income, than that medical expense deduction might be lost. So think about that also.

So those are reasons to convert, reasons not to convert.

So I just want to take one step back on the conversion here and talk about... People say, well, I don't want to pay the taxes. The whole Roth conversion strategy, okay, really comes down if you had it in a nutshell, it's tax arbitrage. Will your taxes be lower or higher when you have to pay the tax?

So let's just look through this one example, and then we'll kind of... So let's say you have $100,000 in an IRA, right? You have $100,000 in there, right, and let's say it doubles, okay? Now you have 200,000, but now you've got to pay the tax on it, right? So 30% tax, we'll just say it's 30% tax on it. So you've got paid $60,000 in taxes, right?

So that net, you net out 140,000 net. So let's say you have that same 100,000, right, and you say, I'll put that into a Roth and pay the taxes straight away. So 30,000 in taxes, 30%, right? So now I only have 70,000 to invest, but it doubles once again, because it's like for like, right? And it comes out to a net 140,000.

So the point we're trying to make here is we're looking to take advantage of lower tax rates when we do the conversions, right? So if you're in a high tax bracket now, you want to get your deductions from that. But now when you're retired, or nearing retirement, and you're not working any more, your income is going to go down. Great time to do those conversions, all right. So that's the window.

Especially railroaders, which I think is great, is because someone might retire at 60 and the government's not going to require this money until 72. Holy mackerel, I've got 12 years now to just do a nice, slow Roth conversion strategy, little bit every year. So when the government comes for their money at 72, you can say, it's all tax-free, what do you want me to do? I got nothing. I already paid you.

So that's something to think about, all right? So I hope you found this video helpful. Reach out to me, if you're near retirement and you want to understand these Roth conversions, really important to kind of hedge yourself against a tax risk with taxes. You know, they probably are going to go up.

Please subscribe to my YouTube channel, like this video, share it with other railroaders. Especially, like I say, those coming nearer to retirement, all right? And those who aren't, this is the kind of stuff you would want to think about later down the road,, right?

You all did a great job of accumulating assets. It's how you de-accumulate if there's such a word, your assets.

All right. So everyone, until next time, please stay safe, stay on track, and take care. So long, everybody. Bye.


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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.