1ROTH IRACONVERSIONSTHE NEW NORMALFOR TODAY’S FINANCIAL PLANNINGHow Roth IRA’s have taken center stage in wealth creation for middle to upper class Americansand why the financial industry largely ignores the most critical phase of your financial life.
2Downhill PlanningWith retirement around the corner, a marriedcouple visits a financial advisor for the veryfirst time.The husband explains to the advisor, “We’ve saved 750,000 for retirement.” Upon reviewing theirstatements, the advisor politely remarks, “Youonly have 500,000 here.” The couple laughs at theadvisor’s attempt at humor. But they soon realizehe is not joking as he explains their nest egg hasnever been taxed. As they withdraw their 750,000,Uncle Sam will kindly take 250,000 in taxes.Next, the wife proclaims, “Well, we’re never goingto need most of this money; it will just go to ourkids.” The advisor smiles and replies, “It might betrue ma’am that you will never need this money, butthe IRS does need your money. This is why they willforce you to take taxable distributions whether youneed them or not. Furthermore, the IRS will alsotax whatever you leave behind to your children.”Like many Americans, you’re probably in avery similar situation. Making matters worseis a seismic shift that has quietly occurredover the last two years, drastically alteringretirement outcomes for the foreseeable future.The direction of our county’s fiscal and policyactions has silently created a ticking time bombunderneath the feet of those who are retired orsoon to be retired. And nobody is talking about it.At the epicenter of the solution to this recentconfluence of factors is the Roth IRA conversion.Unlike traditional IRAs and 401ks, qualifiedwithdrawals from Roth IRAs are generallytax free for you and your beneficiaries! Rothshave become the biggest potential savingsopportunity of a generation of retirementsavers. So why isn’t anyone talking about it?Downhill Planning: The most critical aspectof financial planning, and why it getsoverlookedGetting to retirement is like climbing a mountain.You drudge forward, paycheck after paycheck, andfinally one day you realize you have made it to thetop; you are ready to retire. We perceive this climbup the mountain towards retirement as a lifelongstruggle. But once we get to the proverbial top, wecan breathe a sigh of relief and coast downhill,right?Wrong! The fact of the matter is this getting toretirement is the easy part! All you do is save 10%of your paycheck for 40 years. That’s it. It is notrocket science. Savers retire, non-savers don’t. FullStop! Ask any retiree to list the 10 most-difficultthings they have gone through in their life. Savingfor retirement does not make the list. The criticalaspects of financial planning occur AFTERretirement and this is where most failed financialplans die.I coined the concept of “downhill Planning” yearsago. It is the art of strategic financial decisionmaking during the retirement years to maximizemultiple-generational wealth, reduce taxes, andavoid running out of money.
“GETTING TO RETIREMENTIS LIKE CLIMBING AMOUNTAIN.”
4Downhill Planning Retirement ConceptsDownhill Planning Retirement ConceptsStrategies to fall into the lowest tax bracket possible during retirementPlanning with an eye towards minimizing Medicare Part B premiumsAttempting to reduce or avoid taxable RMDs at age 72Looking at multiple factors in attempt to maximize retirement cash flowsImplementing a Roth conversion strategy to save taxesthe past. But times have changed! Currentlyenjoying some of the lowest tax rates in history,American’s are facing a multitude of factors whichall but guarantee rates will soon explode higher!Historical Highest Marginal U.S. Federal TaxRatesMaking decisions now, to save you and your family taxes laterUnfortunately, the financial industry largelyignores downhill planning. If you don’t believeme, Google the word “retirement” or “retirementplanning” and you will find a multitude of linksgeared towards one thing selling you productsand services. This is where the industry makesits money. But again, saving money for retirementis not really the hard part. “Gee, Mr. FinancialAdvisor, thanks for helping me make money. Thestock market goes up most of the time anyway sowhat did you really do for me except take a fee?”Yes, the decisions made after retirement are oftenthe most important ones. Unfortunately, helpinga retiree with the concepts of downhill planningare not very lucrative for financial advisors. Theindustry has brain-washed Americans into askingthe question “Do I have enough to retire?” Butsavers already have enough. What they reallyshould be asking is “What are the smarteststrategies I need to follow during 0%37%Taxes Are Headed Up for the ForeseeableFutureSocial SecuritySeismic shift has occurred, placing RothConversions at the forefront of RetirementPlanningMedicareUS Post OfficePandemic StimulusWashington PolicyInfrastructure BillFinancial advisors have traditionally recommendedRoth conversions to individuals expecting tobe in higher tax brackets during retirement. Yethistorically, most retirees end up in a lower tax bracketduring retirement. Therefore, Roth conversionshave not been a popular choice for retirees inNational DeptReserves Projected to be Depleted by 2035 53 Trillion Underfunded (Cohn) 161 Billion in Debt (Washington Post)Six Major Bills costing 5.3 Trillion (Peterson Foundation)Biden Aims to Raise Top Tax Rates (Kiplinger) 2 Trillion Proposed (New York Times) 40 Trillion by 2031 (CBO)However, rising tax rates are not the biggest concernfor savers. The real threat to multi-generationalplanning quietly came to fruition with the passingof the SECURE Act.
Enter the Roth ConversionBeginning in 2020, beneficiaries are now forced tocompletely liquidate inherited retirement fundswithin 10 years of their parent’s death. This is ahuge change that in many cases is costing familieshundreds of thousands of dollars in additionaltaxes.To understand the significance of the SECURE Act,consider Curt. At age 65, he retired with 750,000in his company’s retirement plan. With his modestlifestyle, Curt’s pension and social security incomecovered most of his retirement expenses. Notneeding to draw much from his retirement savings,his accounts earned more each year than what hewithdrew. By the time Curt passed away in 2020at the age of 87, he had nearly 1,500,000 in hisretirement account. His son Michael, an Engineerearning six-figures inherits Curt’s retirement. Butnow, thanks to the new SECURE Act, Michael’stax situation changes drastically for the worse.Over the next 10 years, he will be forced to cashout 190,000 annually from his dad’s inherited5retirement. He is in the top tax bracket and willend up paying Uncle Sam an additional 500,000in federal taxes over the next decade. Had Curtconverted his retirement to a Roth IRA prior to hispassing, his son Michael would have inheriteddad’s retirement money and never paid a dime oftaxes on it.Enter the Roth ConversionThe general concept of a Roth conversion is simple pay some taxes now to avoid paying more taxeslater. The decision to convert to a Roth requirescareful planning and consideration. In most cases,it is a 5 to 10 year plan to systematically transferqualified retirement assets into a Roth IRA. Be sureto find a financial planner who has experience withconversions and focuses on Downhill Planningconcepts. Since the majority of Roth conversionsavings are tax-related, finding a planner who isalso a CPA can be a huge plus.“GETTING TO RETIREMENTIS THE EASY PART!”
6Roth Conversion CriteriaFinally, it may be beneficial to review a Rothconversion sooner, rather than later. If taxes do goup in the future, taxpayers converting now whileConsider a Roth Conversion if any of theFollowing Apply You believe tax rates may increase in the future or;You’ve saved more than 500,000 in qualified retirement assets or;You are near or in Retirement or;You may end up leaving some of your nest egg to your children or;You have other sources of retirement income (Social Security, Pension,Farm, etc.)rates are still low will likely benefit. In addition,a conversion makes sense while both spouses arestill alive, thereby taking advantage of marriedtax brackets which are twice the size of singletax brackets. Lastly, since they potentially reducemulti-generational taxes by hundreds of thousandsof dollars, the Roth conversion opportunity maynot be around forever.Roth Contributions and the Back Door RothFor those who are still in their earning years, thereare some additional opportunities to consider.While these three options in no way compare to thepower of the aforementioned Roth conversion, theymay be a step in the right direction. In recent years,more employers have started offering Roth savingsplans or Roth 401(k)s. Be sure to consult with yourtax advisor before contributing to these. Theywill impact your tax situation. At the time of thiswriting, the maximum Roth 401(k) contribution isbetween 19,000 to 25,000 depending on your age.For those that do not have a Roth savings option atwork, taxpayers may qualify to contribute to a RothIRA outside of their retirement account at work. Atthe time of this writing, the maximum Roth IRAcontribution is 6,000 to 7,000 depending on yourage. Some high earners cannot contribute to a Rothat all. Many taxpayers in this situation have foundthe Back Door Roth to be a compelling strategy.A backdoor Roth IRA is not an official type ofretirement account. Instead, it is an informal namefor a complicated but IRS-sanctioned method forhigh-income taxpayers to fund a Roth, even if theirincomes exceed the limits that the IRS allows forregular Roth contributions. Because anyone cancontribute to a Traditional IRA, the Back Doorstrategy entails contributing money to a traditionalIRA and then rolling over the funds to a Roth IRA.Keep in mind, a back Door Roth is not a tax dodge.When you convert money from a traditional IRAto a Roth IRA, you owe the taxes on the entireamount transferred in that tax year. For example,if you contribute 3,000 to a traditional IRA andthen convert that money to a Roth IRA, you willowe taxes on the 3,000. But with the Roth IRA,you generally will owe no further taxes when youwithdraw that money after retiring. As always, seekprofessional advice before making any decisionsabout Roth conversions and contributions.DOWNHILL PLANNINGTHE MOST CRITICAL ASPECTOF FINANCIAL PLANNING
7AUTHOR BIOCHRISTIAN CYR - CPAA certified public accountant for over 20 years, Christian helps clientsunderstand the best approaches for investing, building wealth, andretiring comfortably. He spent over 15 years in the corporate world asa chief financial officer before becoming a Registered Investment Adviserwith expertise in retirement planning.He is a financial professional who can offer investment andinsurance products and services. He has a master’sin finance from the University of IllinoisChicago and a bachelor’s in finance fromEastern Illinois University.Christian speaks to audiences nationwideabout his passion for investing andretirement and shares the thinkingbehind his investment strategies.He has been featured on StrategicInvestor Radio, the NationalAssociation of Active InvestmentManagers’ Shark Tank competition,and other media outlets.Christian and his wife, Jamie,live in Hennepin with theirthree children, Joseph, Emmaand Benjamin. In his sparetime, Christian enjoysgolfing, gardening andplaying the drums.
8Works CitedNOTE: Producers may use titles and designations that reflect their educational background andthe licenses they may hold. The use of non-existent or self- conferred degrees or designations isprohibited. If media sources are used, verification is required as to how you were featured in thelisted outlets. If they are commercials or paid advertisements, they could be considered misleading.Works CitedCBO. The Budget and Economic Outlook: 2021 to 2031. 11 February 2021. Web. 12 April 2021. https://www.cbo.gov/publication/56970 Cohn, Michael. Accounting Today. 7 April 2020. Web. 12 April 2021. ts-financial-condition-worsened-by-8-16tin2019#: :text 0trillion%20worth%20of%20bills.&text 0this%20art Kiplinger. President Biden’s Tax Plans for the Next Few Years. 3 February 2021. Web. 12 April 2021. idens-tax-plans-for-the-next-few-years New York Times. Biden Details 2 Trillion Plan to Rebuild Infrastructure and Reshape the Economy.31 March 2021. Web. 12 April 2021. y/biden-infrastructure-plan.html Peterson Foundation. HERE’S EVERYTHING THE FEDERAL GOVERNMENT HAS DONE TORESPOND TO THE CORONAVIRUS SO FAR. 15 March 2021. Web. 12 April 2021. ht t ps://www.pg pf.org/blog/2021/03/heres-ever yt h so-far SSA. The Social Security Administration’s Agency Financial Report (AFR) for FY 2020. 2020. Web. 12April 2021. ion.pdf .Washington Post. The Postal Service needs a bailout. Congress is partly to blame. 15 April 2020. Web.12 April 2021. /postal-service-bailoutcongress/
IRA and then rolling over the funds to a Roth IRA. Keep in mind, a back Door Roth is not a tax dodge. When you convert money from a traditional IRA to a Roth IRA, you owe the taxes on the entire amount transferred in that tax year. For example, if you contribute 3,000 to a traditional IRA and then convert that money to a Roth IRA, you will owe .