About this episode
In this episode, David McKnight walks you through the five biggest Roth conversion traps, and how to avoid them.
He is a big believer in Roth conversions.
Because of the apocalyptic fiscal trajectory of the U.S., taxes in the future are likely to be dramatically higher than they are today.
Hence, every dollar you reposition from tax-deferred to tax-free at these historically low tax rates may be one of the smartest financial decisions you ever make.
However, while many people understand Roth conversions in theory, they still get them wrong in practice – David has seen some very costly mistakes over the years.
The first big Roth conversion trap is waiting too long.
True: nobody wakes up excited to pay a tax 10-20 years before the IRS absolutely requires it of them…
…but we're living in the middle of "the tax sale of a lifetime", which is likely to end in or around 2035 and will see the Federal Government forced to raise taxes.
The second Roth conversion mistake has to do with not maxing out the appropriate tax bracket.
If you have a substantial amount of money in your IRA or 401(k), David says that you won't be able to fully execute your Roth conversion strategy unless you take full advantage of the 24% bracket.
"When 2035 rolls around, we'll look back at the 24% bracket as a good deal of historic proportions", highlights David.
Over-converting is the third big mistake people make when it comes to Roth conversions.
When people come to the conclusion that future tax rates are going to be higher than the current ones, they often panic and reflexively convert all of their tax-deferred retirement savings to Roth.
What they forget, however, is that, in retirement, they will still have a standard deduction.
Remember: Eevery retirement strategy you undertake should be calculated to extend the life of your investments, not shorten it.
Roth conversion trap #4 is letting the fear of IRMAA (Income-Related Monthly Adjustment Amount) dictate your Roth conversion strategy.
The fifth Roth conversion trap is not paying taxes on your Roth conversion out of the right place.
Mentioned in this episode:
David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track
The Power of Zero: How to Get to the 0% Tax Bracket and Transform Your Retirement by David McKnight
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
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