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Our mission is to guide motivated people to become financially successful. Okay, today we have another audio from the 90 days from retirement YouTube channel. Again, I was with Eric Soderbergh, who runs that channel. And this was a response to the video that we did on Roth versus traditional. And that one last night had over 440,000 views. Wow. So a lot of people, surprisingly, are willing to sit through an hour of talking about versus traditional, it's kind of blowing my mind, I enjoy it. I just didn't know there were that many people out there that would listen to it as well. So we had a ton of comments. And I was surprised at how passionate people are in the comments section on YouTube about this particular topic. Like there are some that are diehard Roth and some that are diehard, traditional, and I think thinking that way is actually a problem. It's an error. And oh, something else that was fantastic in the comments. So in that video I talked about, you wouldn't pick one out of the three utensils, fork, spoon and knife and just have to use one for the rest of your life. Like it's nice to actually have the utility of all three are interesting. And the same concept goes with Roth traditional, and after tax. It's nice to have the utility of all three and 

a spoon for everything. So 

I actually did ask him like, okay, Eric, if you had to pick which one would you use? So there are quite a few comments, arguing like, which of the utensils Oh, no kidding, nothing to do with Roth or traditional comments. And I am loving, like, absolutely loving the logic and like the intent of these people in the comment section of YouTube, that's arguing why a knife is better, because you could cut and make a spoon with a knife. And like, there was so much so much thought and read it and you think, well, they have a lot of reason and logic behind it like, oh, yeah, that's true. And then you hear the utility of the spoon or the argument of the fork, and then you realize you do need 

all of them. Yeah, I guess you don't have to have all of them. But it sure is nice. It's nice. Yeah, it's better, it's gonna be better. Yeah, 

with the traditional Neurath. It's nice to have both. And they do their job better than the others. Right? 

So the main video had over 440,000 views so far. Today, it is January of 2024. And it keeps growing. And with all of those questions in the comments, we did a follow up video. So this is the follow up. So we basically took a lot of the questions that were not related to utensils that were actually related to Roth and traditional. And we dived into the ones that were more nuanced. So the ones we could just answer quickly. And that were simple. But this is a nuanced situation. And it's not always a simple answer. And there usually are quite a few factors thrown anyway. So we just basically walked through some more of the difficult questions to answer in this one. So people 

don't need to read through the whole comment section, they can just come here, get the more difficult, maybe some easy questions. 

And you can listen to this, it's a shorter one. And of course, if you want to watch the full episode, you can go to the 90 days from retirement YouTube channel. I've really enjoyed working with Eric on this project. He's a really great interviewer, and he's not from our industry. So he asks

questions that helped me realize what people not from our industry think, and how they understand me helps get me out of the jargon a little bit. Anyway, he's great. And I've really enjoyed spending time with him. So we'll put the link to the 90 days from retirement YouTube video for this in the show notes on the financial call.com. Or you can just go to YouTube and type in 90 days from retirement, you'll find it that way. Or you can listen to the rest of this. And we'll put the audio from that video here in the rest of this episode. Thanks for listening. Alright, so in this video, we had a conversation around traditional versus Roth investments. It had pretty good traction there, if you haven't seen it. It also generated a lot of comments because people feel very passionately about one or the other. Most of the comments came because they didn't make it past minute 20, which is understandable. It's an hour long video, people have busy lives, if they would make it past minute 20. A lot of these would be addressed. But we wanted to go through some of these questions and then maybe you can touch on them and take us through this. So when he's talking about Roth and traditional this one was big advantage to Roth IRAs or Roth investments in general, is they do not have required minimum distributions. So maybe you can kind of tackle RMDs as they relate to Roth versus traditional. Yeah, 

huge advantage traditional just to give everybody context, the age has changed between 70 and a half 70 to 7375 coming up for some people then this is the age at which you You need to start taking money out of your portfolio. And when I say need, it's not because you need it, it's because the government needs you to pay some taxes. So they have a schedule, and they say, Hey, you have to take out x percent per year, and that percentage amount goes up. So it starts off a little bit under 4%. And then by time you get to 115, the table stops counting, you're taking half the portfolio every year. So it goes from just under 4% to 50%. As you get older, now, the curve of that increase is kind of flat. And then as you get into your late 90s, and into 100, it spikes up because they know you're not going to live as long after that. And so they're trying to have you pay taxes on as much as possible before you pass away without being terrible to you and making you pay taxes on everything and then living another 20 years. So they're trying to predict that and they do a pretty good job with tables, actuarial tables to figure that out. So that's just a little background for everybody. Yeah, the traditional forces you into minimum distributions, the Roth does not, I'll give you an example, I just was strategizing for an individual on this. And the first step is usually for us to take, okay, all your traditional money, what is the thing you're most afraid of actually happens, you have to take a minimum distribution from this account in your lifetime. And we want to figure out what does that look like at 73, when you first have to start taking it out. And if we find it's only $40,000 a year plus your Social Security and you don't have any other income, that's probably not that big of a deal. And you'll probably pay somewhere around 10 to 12 or 15%. Taxes on that, again, not a huge deal. But as you get older, the percentage goes up. And so if your investments climb and the percentage goes up, then maybe you're having to take 15 or 10, or 15% of the portfolio. But that's not for decades, like that's not until late 80s, mid 90s, before you have to take that high of a percentage, so it's not going to climb super fast. Now, the real rub here, though, is if one of you passes away, and you're filing jointly, and all of a sudden, you have to file under single tax brackets, basically all the lines get cut in half. So you hit the 12 15%, I say 12 or 15, because it's changing, but that 12 Slash 15% or 20 to 25%, you just hit those a lot sooner if you are single. So the way that I would strategize around this is first model out worst case scenario, you have to pay a full minimum

distribution, figure out what that is, and throw that through a rough estimate on taxes, your average tax rate may be 789 percent, if that's the case, it's really not that big of a deal. Now, if you are throwing a minimum distribution like that, on top of a lot of other income, maybe you have rental income, maybe you have royalties, pensions, Social Security, you're in a situation where you're already at two or $300,000 of income in retirement, and you're stacking on you have a three or four or $5 million IRA, which you've seen before, and you're stacking on a minimum distribution on top of that, well, now all of a sudden, you're in a world of hurt. The question, though is, is that even still less painful than you converting? Today? It might be because maybe that person is making $800,000 a year right now and income, then stacking on Roth conversions on top of that is probably worse than just taking the minimum distribution and having it slide in somewhere in the 234 $100,000 range. So if you didn't listen to the first episode on this, like we're taking all of these comments have to do with the assumption that if your tax rate is the same, and your growth rate is the same, you'll end up with the same spendable that is important for people to understand if for some reason, a lot of comments they're like, but what if tax rates go up? And I'm like, exactly, exactly. If your tax rate is gonna go up, you should probably do Roth, yeah, if your tax rates go down, you should do traditional. Or, if you're just trying to max fund your contribution limits, then let's call it 22,500 into a Roth 401 K is more than 22,500 to a traditional 401k. Or you want a little bit of everything for control degrees of freedom, we call it flexibility. So for that person, minimum distributions matter, model out the worst case scenario, model out the scenario of you convert everything over to Roth, and then model out a middle scenario, and then you'll start to get a better feel for which one produces the best overall tax situation. I do see though, I had this one client where he basically has a couple million dollars of IRA money, and that's it, and a lot of social security income. And this is really fascinating, because if this individual does not convert to Roth, and just lets it grow and takes the minimum distribution, that minimum distribution money, forces, Social Security to also be taxed, but if he has no other income, he has about 70 or $80,000. Between him and his wife have Social Security income, they can basically make all of that Social Security Income disappear. So this individual, if he's willing to bite the bullet a little bit, convert to Roth, from ages 60 to 73, and get that couple million dollars over to Roth, then not only do they not have minimum distributions, but they only have to show like eight to $9,000 of their social security income, standard deduction will wipe that out. And basically, they're at a 0% tax bracket for the rest of their lives. So that's you model out both extremes, and decide if, in some cases, the optimal thing for a retiree is to be at one extreme or the other. And then in some cases, the extremes are not helpful, you actually want to just fill up whatever headroom you have in the 10 and 12%. Brackets, because you know, you're going to be a little bit higher later and you fill up as you go 

on. I hope the point that people got, if they made it far enough was like you're not recommending everybody go to Roth, you're not recommending everybody get traditional, right? depends on your situation right now. It's 

both Yeah, I'm just recommending you pay the least amount of taxes possible. That's what we're talking about. Right? Well, 

and I clarifying on that, is that the least amount of taxes possible as a percentage of what you have, or the total dollar amount going to the government? Does that make the commission?

You know what, that's true? Correct, that then I'm not recommending they pay the least amount of taxes possible. In dollars, I'm recommending you create the most spendable wealth, which might actually mean a higher dollar amount into taxes, depending on the situation. So the end goal is, what matters to an individual is how much money they can spend. So after taxes, I'm trying to create the highest spendable wealth, that's the bottom line. 

Well, another thing finishing this RMD discussion is the potential that that could throw you into a higher income bracket for Medicare and Irma. So the base amount if we're going into 2024, is $174.70 a month, if you're making $500,000 or more, and there are different brackets or levels here, but that's $594 a month. So it's almost it's 400 plus $420 more per month, per person, per person, right? So a couple each has to do think about that, that way, you're thinking that's about a $5,000 additional cost per person per year, for that year. So that's $10,000. If you're a couple, and I will then take that $10,000 and divide it into the amount you were able to convert over. Let's say it was $100,000, you convert it over to a Roth. And it costs you $10,000 of extra Medicare premiums. Not quite 10. But we're using easy math. Yeah, that's a 10%. Tax for one year, right. That's not forever. That's for that year. So you just need to think about your Medicare excess charge as an additional tax rate. And that will help you know if it's worth it or not. Yeah. So this one came up a lot. It was anybody who thinks that tax rates aren't going to go up in the future is crazy. Yeah. So maybe you can explain tax rates them potentially going up? And how that impacts this decision. 

Yeah, I'm not gonna call anybody crazy anywhere. But I do believe the tax rates will go up. Yeah. And I don't know, if they were calling us crazy. Maybe that's what they were doing. I don't know, probably okay. But I think tax rates will go up. The Bush era tax cuts were temporary. So the current schedule that we have, and there's a lot that changes after 2025, we did an evening, we call it a boot camp for all of our clients and anybody else who wanted to come at a local college, and we rent out an auditorium. And we just bring everybody in. And we spent quite a bit of time I taught on this exact topic, what happens after 2025 certain deductions come back, certain deductions go away. And specifically, the thing that will affect everybody is that marginal tax bracket lines and percentages change. Right now we're at 10, then 12%, then 22. And it keeps going up. And those are the three brackets I usually talk about most because that's what most retirees are in, you know, it goes 1015 25. So the 10% bracket stays the same 12 goes to 1522 to 25. And it keeps going up and go up to 28 from 24. On the next bracket up, you get the idea. So pretty much, most people are going to have an additional three to 4% in each bracket except for the 10 rates are going up. That's 2026. So if you are thinking about your strategy around converting to a Roth, you might wait the years in 2023. We don't have a lot of time left for 2023, but 2023 2024 and 2025. A little heavier, because you're getting that at a lower tax rate than in 2026 and beyond. But the point in the comment is actually not the sunsetting of the Bush era tax cuts. I think the point in the comment is we are spending so much money as a government how in the world would we not have insane tax rates in the future? $4 trillion debt is what it was talking about. I 

Yeah. So politically, I'm very in the middle and nerdy enough to take the tests to find that out. Yeah. So don't take anything I say from one side or the other. But the reason Alabama is the debt is big. But our ability to be the reserve currency in the US and have the dollar be the safe haven, where every other country looks to put money, when their own currency isn't as safe gives us immense power as a nation in the world. And it also provides us with a lot of

opportunity to control that debt and asset value. I mean, yeah, if we have that much debt, but we just print more money, it makes it a lot easier to pay it off, right. So a lot of your clients may be really stressed about that. And a lot of people who are listening who are in their 60s may be really stressed about that. I think that's more my problem than their problem. Do you know, I mean, I think I'll be paying for that later than more so than they will be. Okay. So going back to will rates rise? Yes, I think so. I think beyond the Bush era tax cuts, we will go through in a five to 10 year period, where we are just livid about tax rates, because we hate them today. And they're pretty darn good right now. I mean, they're really, really reasonable compared to history. Once again, I'm not talking about like whether taxes are good, or, or how big or small our government should be. I'm saying that compared to history, we currently have really, really low tax rates. So if you just believe in mean reversion, meaning, things will come back to the average, I would expect tax rates to go up and even be higher than average in the future for a period of time. So yeah, that lends itself to do more Roth conversions while you have the chance, if you believe that way. 

Yeah. And I think the big thing to hear that you've touched on and other things is that in retirement, your tax rate isn't like if I'm taking my earnings before retirement, and my income brackets, and my expenses and everything else are so much higher, say I'm making $500,000 a year in retirement, I potentially could live on $100,000 a year. So I'm dropping tax brackets in that sense, not that tax rates are dropping, but I am dropping tax brackets, right. I've seen people in the highest bracket, which is I'm thinking of a couple right now in my mind, they are in the 37% tax bracket, the highest bracket possible when they retire, I know what they spend, because we do their planning, based on what they spend and how we will be able to control their tax rate in retirement, they're only going to be in the 10 and 12%, tax brackets. That's an extreme example, that's not normal, but they're in the highest, and they're going to go to the second to the lowest. So even if the 12 goes up to 15, or 20. Even if the 12 more than doubles, it goes to 25, that's still cheaper than 37%. For them. If they stay in that highest tax bracket, it's gonna go up to 39.5 after 2025, and then probably higher in the future. And at one point it was 90% in the past, so I just think they will drop rates, they will drop brackets, even though rates will go up. 

Another question we had is that you referenced like they were making over $500,000 A year and they were putting it into a Roth 401 K. And so the question was, well, wait a minute, you have maximum earnings to allow you to put it into a Roth IRA. So I think I gave away the answer. But maybe you can clarify the earnings cut off for Roth contributions, yeah, in your mind, separate 401, Ks and IRAs as much as possible as the account type. And then the tax structure is a subset of those two account types. So you have 401k, then Roth or traditional IRA, Roth, and traditional, all those income rules are clouding up the IRA situation, they just don't apply to the 401k. So it's pretty simple. You could be making as much money as you want. And you can contribute to a Roth 401 K. I mean, at some point, it's kind of hard to justify because your tax rate is so high, but that's a strategy thing and not an eligibility thing. Gotcha. How much did they ask about like, contribution eligibility to IRAs, backdoor Roth's contribution, eligibility, or deductibility? Ira versus Roth? Did anybody ask about that? Backdoor Roth came up a lot in terms of like, here's what people should do. Yeah. And comments. So backdoor Roth came up a lot. Eligibility not as much other than like, I thought that there were income limits, there was an eligibility around like kids, so paying kids the amount

or a spouse. Right, so a spouse has to earn a certain amount to fully fund it, but it's the couple are going through the Yeah, 

stuff. Okay. So let's first dispel some confusion around the spousal IRA. Some people think because the way the government talks about a spousal IRA, they think that is an account type. A spousal IRA is not an account type. It's just a contribution eligibility rule. So people are like, Well, wait a second, what if my spouse puts money into my spousal IRA? Can I put money into the spousal IRA? It's like, I've never seen any brokerage firm account holder of any type right on the statement, spousal IRA. It's just a traditional IRA or a rollover IRA or a Roth IRA. And the spousal eligibility is what we're talking about here. And as long as the couple, someone has made money, you can contribute up to however much you've made. or the maximum contribution limits which tend to go up every year, but $6,500 a person if you're under 50. So if you had $13,000 of income, you could max out each of your contributions to each of your IRAs. Even if all that is earned by one person, if it's split, however it's split, it doesn't matter, you can make the contribution to either we had one question in there, they said, Well, what if I make a contribution for my spouse, but then my spouse earn some money? Do we have to pull that back out, and then have her make the contribution? The IRS isn't stressing about that they're just looking at how much total income does the couple have? Do they have enough to be able to make the contribution. And your limit is like, if you only made $2,000 In the year, you can't put in 6500, right, you could put in 2000, into one, or you could put 1000 into each or however you want to set that up. So that was the first one is spousal IRA. But you also mentioned backdoor Roth, at some point, you are no longer eligible to contribute to a Roth IRA. These change every year to but let's just It's about $200,000. So if you want to set a goal for yourself, set a goal to not be eligible to contribute to a Roth IRA. That's a cool goal. And you crossed that. So at some point, you can't contribute to a Roth. The rules are, there's no limit on how much you can make and put into an IRA. So they're a little bit different. The Roth is, Hey, you can't even put the money in this account. If you make too much traditionalist, you can put money in no matter how much you make, you just can't get a tax deduction for it at certain levels. So what's happening there is, by the way, the traditional line of where you get a deduction, you lose the deduction before you get to the 200, where you can't contribute to a Roth. Okay, so what people are doing, there's typically the folks who make a lot of money cannot make a contribution to a Roth anymore. So they might be making $300,000 a year, they can't make a Roth contribution. But they can put money in a traditional, because there's no income limit, they can put money in a traditional, they're not getting a tax deduction on it, they don't really care, because then they convert that after tax money in the traditional over to the Roth. And now they call that a backdoor, which I wouldn't call it that because the IRS is probably not going to love that. I would call it conversions of non deductible IRA contributions. But that's definitely nerdy and not what people want to call it. Right. But anyway, so the problem with this the pitfall, this is just if you're thinking about the strategy, if you have $100,000, in an IRA, that's all pre tax, and you drop 5000, actually, I'm gonna make the math even easier. Can we take that back? Well, if you have $95,000, in an account, that's all pre tax, and you put $5,000 in, and you decide I'm going to convert that $5,000 of after tax money, the IRS does not let you select the source on the conversion. They say, okay, 95% of the total account is pre tax 95% of your conversion is taxable income to you. Gotcha. And then you end up leaving some after tax money over there,

and you have pre tax money, and now you're having to manage that and account for that, which is a nightmare. 

I think it's common actually said that that's a nightmare, right? Okay. So 

then what you do is, you take all the pre tax money in your IRA, roll it over, there's this curtain between 401, Ks and IRAs, and the IRS is mined. So you take all that pre tax money in your IRA, roll it into your 401k, IRS no longer counts it as pre tax IRA money. So now you have an empty IRA, you make a contribution to it. And then later, you could do a non deduct, because it's non deductible, right? It's all after tax. So when you do the conversion, it's all after tax, and so you don't have to pay taxes and you're able to convert it all. That's the backdoor Roth, was there something I heard there was like a super backdoor or something like that. Yeah, so that's less common. It's the same exact concept as the IRA. But the IRA only let you put in 6500. The 401k allows you to put in 22,500. And so there are rules that allow some and this is employer specific, some plans will allow an individual on top of their regular contributions to drop in another maybe 22,500 have after tax dollars, it needs that capability in the plan. It also needs the capability to do in service conversions of just that or in service, meaning you're still employed. That's what they mean by in service, or an in service rollover of that money out of the plan. Before you're 59 and a half. Or if you're over 59 and a half. Maybe that will work. That's usually a kicker. So the point is, your plan has to have like two or three things set up. Your employer has to be pretty savvy to know like, oh, people want to do this. We better make these rules in our plan available. So anyway, you have to be able to make after tax contributions, you have to be able to do maybe a rollover of just the after tax source, and you roll it out then to a Roth IRA. So then you're getting like 20 to $30,000. That's less common just because fewer employers have those rules set up. A lot of them are like, I have a real job. I cannot sit here and help you with your personal finance strategies. Yeah, they're like a 401 K plan. We're not changing that. Yeah, for you. That's usually what happens. That's 

so interesting. Well, and maybe this might take us in somewhere, we don't want to go. But the question is Roth sound very good. However, the government said people would never pay more than 3% towards social security. Later, they tweak that figure, and ever since it's been off to the races in terms of they said it would never be taxed, they would never be whatever. Do you foresee any circumstances where? And you can say like, I can't answer this, but we're off could become taxable. Because social security income wasn't supposed to be taxable, and then it became taxable. 

Yeah, I tried to look at statistics on things and probability of things and assess. We don't have data to do any statistical analysis. But we do have, like, I feel like you can make a reasonable estimate based on voting populations. I'll lean back on that pretty regularly. Like, what is the public weal for that? And what kind of insane revolt would you have? And how bad would people be? And how, how likely is that to happen? Let's just take a step back. So the question is, how likely is it that I do all these conversions, pay all these taxes, and then I ended up having to pay taxes on it later anyway. I think that your likelihood of being double taxed is very, very low. The likelihood of potentially having to pay taxes on just the growth in the Roth IRA, that would be more likely, I mean, double taxation on something would just be insane. But all of it is extremely unlikely. If the government is trying to come up with income, and trying to improve, there are so many other levers, I mean, imagine a room with 1000 levers just sticking out of the wall. And they know that 10 of them are just going to just create an immense amount of anger in

their voting population, they're going to pick on the other 990 levers. And to me, that's one of the 10 out of 1000 that they could do that would really, really just upset people. So there's so many other things they can do in namely, people in their 30s and 40s, I think, will be subject to a lot higher taxes on things like social security, or like we already have an investment income tax, a lot of people don't know about it, there's a 3.8% tax on any investment income, when your income is greater than $250,000. A lot of people don't even know that that exists, because it doesn't ever show up. And for the people, it does show up, I think more than half of them don't even know they're paying it, because it gets calculated deep in the tax returns. And then it just shows up as a total federal tax. So they don't even know that there's that 3.8% tax. So there are so many levers so many ways they can change things. And I just feel like that's extremely unlikely. I do see I mean, I'm 39 by time I get into my 60s, I think social security for retirement age will be quite a bit higher than it is today. 67 For most of us, right, that's a pipe dream, it's going to be higher, 

there was a comment on this, that that assumption is way off the base, there's no way they would raise the full retirement age or 

they've done it four times. Okay. I mean, if they've already done it, they already have a model when you have a model for something and you saw that it didn't make you lose an election that didn't make the public to mad at the reason it doesn't make them mad is because they grandfather all the people in who are currently on Social Security. And so the rest of us aren't even thinking about Social Security. And then we find out a decade later that they made the change. So that's where I think they will strategize around like, Okay, well, you people who really care about it, you're fine, we'll leave you in the way it is currently will grandfather you. But the people who aren't yet at the door don't even know there's a door to walk through. Those are the people that are going to pay. I think someday, I could be means tested out of Social Security, forget taxation, I think if there's a chance somebody who's young today saves enough that they may come back and say, Hey, you have a lot of money, because you've saved a lot. I mean, they don't say because you've saved a lot. They're just gonna say you have a lot of money. And therefore, we're not going to give you Social Security income, we're gonna give it to the other people or we're going to use it to build up the trust and like those are the types of things I would see happening before they get into Oregon to start taxing Roth's I mean it's just such a it's down the road. Yeah. 

The means testing that you brought up was also mentioned in the canal was when you have that many comments like everything and he comes was comes to this Jefferson they've said like means testing is a horrible idea. I think that because you mentioned it in the last video. I think it's important for people to understand that because it's mentioned doesn't mean that we necessarily support that I 

Oh, not at all I wouldn't be 

it's just like that is yeah, I'd be really 

upset about it. But I'm also trying to be a realist about the situation. And I'm also thinking like, I'm gonna plan as if my entire retirement picture is on me and me alone. Yeah, any social security help I get any extra Medicare help I get like icing on the cake, but I'm planning as if fun running this thing solo.

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