Thread by @roncaruthers

1. Should you convert your regular IRA or 401k to a ROTH IRA or Millionaire's Roth Account?

Yes.

End of thread.

Just kidding.

Let me show what is happening right now if you have a 401k or IRA:

This question inspired me:

https://twitter.com/mattvandy6/status/1248322276170309632

2. Congress is letting you pull the money out up to $100,000 AND waiving the 10% penalty.

So, you can pull $100,000 out right now if you've been impacted by #COVID2019 in any way.

Better yet: They're giving you THREE YEARS to spread out the tax on what you pulled.

3. I have NEVER seen this before that I can remember,

But, I have a lot on my mind, so occasionally, I forget stuff.

So, let's walk through an example:

Right now, the market is still 15.23% DOWN from where it was at the beginning of the year (it WAS down as much as 31.32%.

4. So, because the market is down, you'll be pulling it out at a 'discount' from what it was at the beginning of the year (and even more so where it was mid-February),

Which means you're paying less taxes on the amount, because it's lower.

5. AND, if you get it back into a similar investment (more on this later), then you shouldn't lose much, if anything, at all.

6. Now, your money can grow tax free FOREVER if you put it into a ROTH IRA or an Indexed Universal Life Insurance account.

(I'll do a thread this week on the pros and cons of each of these, so you can choose what's best for you.)

7. So, you go from paying a huge amount of tax later, to paying a much smaller amount now.

Let's first look at what you pay now:

8. Let's say you make $120,000 as a married couple, and you pull $100,000 out of your IRA, here is what you'll owe:

0% penalty (it's waived)

And tax on an additional $33,333 a year for 3 years.

9. If you were taking the Standard Deduction, you previously would have paid $12,524 in federal tax this year.

Now, for the next 3 years, you'll pay $19,857 a year, or $7,333.

That's $22,000.00 total.

On your $100,000.

You can check my math here:

10. You see, by letting you spread it over 3 years, it keeps you from jumping to a higher tax bracket in this situation, and your money gets to grow tax-free forever from this point forward.

Now, let's see how much you save:

11. If we assume you will make 8%, and the couple is 40, and they're going to retire at 65,

The $100,000 will grow to $684,847.

Whether it stays put, or gets moved.

Now, if you are still in the 22% bracket (you likely won't be because taxes WILL increase in the future),

12. You would owe $150,666 in taxes on the money if you pulled it out all at once.

Except if you did, you would owe MORE than that, because it would jump you up to the TOP tax bracket (at least as of now.)

13. So if our couple made $120,000 that year, AND pulled the whole amount out, they would actually pay

$225,766 in federal taxes for that year (again, assuming taxes aren't HIGHER in 25 years).

10 TIMES the amount they paid now.

But it gets worse....

14. You're reading this thinking:

'Wait, why would they pull it all out in one year?'

Exactly!

So, because they're NOT going to pull it all in one year, it's going to continue to grow, and ultimately, this couple will pay even MORE over the next 20 years of retirement.

15. So, let's say they start pulling 5% a year, they're still averaging 8%, and they increase the amount by 3% each year to keep up with inflation.

They would start with $34,000 a year.

In 20 years, (age 84) they would be pulling $59,619.

16. Over those 20 years, they have pulled out $913,519.

ALL of which they have to pay tax on.

Assuming their tax is 22% (it will likely be higher), they paid $200,974 in taxes.

And they die. 💀☠️😢

They STILL have $1,104,738 in that account that hasn't been taxed.

17. And, because Congress keeps changing the rules on IRA's, their kids used to be able to pull the money out over their entire life, but NOW they government wants it in 10 years.

So, if the account keeps earning 8%, their kids are going to have to pull $164,639 a year.

18. if taxes stay the same, they'll AT LEAST be in the 24% bracket, possibly 32%, but assuming its 24%, THEY have to pay:

$39,513 for 10 years, so another $395,134.

On top of the $200,974.

Grand total: $596,108.

But wait, there's MORE!

19. Congress has a history of raising taxes like madmen.

Look: here are the top rates over history and the line is the 'average' top rate.

20. So, the likelihood that they'll pay even more is very, very high.

So, question:

Would you rather pay $22,000 NOW or $596,108 (or more) later?

Do you want to leave your heirs with a big tax bill or not?

Exactly. Use the math to guide you.

Couple more notes:

21. Next up, I'll talk about WHERE the money should be put, with MORE math and MORE pictures.

AND, we'll talk about how likely they are to get that 'average' 8% return.

22. And,

I will do a 'which is better' matchup between a ROTH IRA and a properly structured Index Universal Life Insurance account.