Thread by @roncaruthers

1. How to Strategically Convert Your Traditional IRA or 401K to a Roth IRA Part One:

First off, in this thread, I'm going to explain briefly what a Roth IRA is and why you might want to convert to one, and then in the next thread, I'll show you the most efficient way to do it.

2. So....what exactly IS a Roth IRA?

Well, there are 3 phases of taxation on your money if you're saving for retirement:

1. The Contribution phase
2. The Accumulation phase
3. The Distribution phase

3. With good tax planning, you can save taxes on 2 of the 3 phases.

With a traditional IRA, SEP plan, 403b or 401k, you save money on the first 2 areas:

You don't pay taxes on your contribution, and your money grows tax free.

BUT...

4. You essentially give up control of the money until you retire....and you have to pay those taxes PLUS a 10% penalty if you need the money before retirement age.

Then, when you DO retire, you still have to pay the taxes, and pay attention here:

5. They are calculated at whatever rates are at THAT TIME.

Now, common logic says that you will be in a lower tax bracket when you retire, but reality says differently.

First, because of inflation, you're likely to be in a higher bracket then simply to survive.

6. Let me explain:

If you're 30 years old, single, and making $50,000 a year, do you know what you'll need to have the same standard of living at age 65?

Take a wild guess.

You ready?

I'll tell you in the next tweet......

7. You will need $140,693 (!!!!!) a year to live the exact same standard of living that you enjoy right now at just THREE percent inflation.

Not 4 or 5%......3%.

And each year IN retirement, you will need MORE money.... because inflation never stops.

At 75, you'd neecd $189K

8. Now, you'd think that tax rates keep up with inflation, right?

Annnnndddd, you'd be dead wrong. They have over the last couple of decades, but NOT over the last 108 years since taxes started.

Allow me to explain:

9. In 1913, the first year we had a legal income tax (they tried before during the Civil War, but it was deemed unconstitutional), here's what taxes were:

1% on any income up to $20,000 a year.

And the max was 7% on any money you made over $500,000.

10. These are not inflation adjusted numbers, btw.

So....from Day 1...income tax was designed to be a tax on the rich, since most people back then barely made a few hundred dollars a year.

However, lets fast forward to today.

11. For this year, if you're single, you give them 10% on your first $9,500, and 37% of anything you make over $523,601.

And, they're talking about raising the tax on the 'rich' AND lowering the threshold to BE rich to $400,000.

So, did tax brackets keep up with inflation? NO

12. Also, 107 years ago, we didn't have a $30 TRILLION dollar national debt.

So, do you understand why I say it's likely that not only will your taxes NOT be lower in the future, they're likely to be MUCH higher?

And don't forget, they've raised taxes as high as 94% in the past

13. So, the big deal with a Roth IRA is that you still avoid 2 of the 3 stages of taxation, you just avoid different ones.

You make your contribution AFTER paying taxes on it, but then your money grows tax-free AND you get to distribute it tax-free.

Let me illustrate:

14. If you're still 30 and single, like in my example above, you can make an IRA contribution to either a Roth IRA (no deduction now) or a Traditional IRA.

If you made a $6,000 contribution to the Traditional, you would save $1,320 in taxes, since you're in the 22% bracket.

15. BUT, you have to PAY taxes on whatever that $6,000 grows to....at whatever rates are in 30-40 years when you retire.

In 30 years, your ONE $6,000 contribution will have grown to $45,674 at a 7% rate of return.

So, yes, you saved the $1,320 NOW.....

16. But you have to pay on the $45,674.

If you take it all in one year, and even if taxes were still *only* 22%, you'd now owe $10,048....or MORE than you contributed in the first place.

But, what if taxes go to 30, 40, or even 50%?

Now you lost...bigly.

17 Now imagine doing that EVERY year for 30 years. Yes, you'd save $1,320 each year, all other things being equal,

So you 'saved' $39,600 in taxes over 30 years....

But you have $566,764 that you have to pay taxes on (again, at 7%)

At 22%, you owe them $124,688.

18. Except, if you took it all in one year, it would cause you to go to a higher tax bracket, so you'd owe more that way,

AND, if you do NOT take it all at once, it's STILL growing, and they're going to want tax on THAT growth too.

19. With the ROTH, you paid the $1,320 NOW, but you're DONE.

So, your money grows and you don't have to worry about what they do with taxes.

Some rules still apply, of course, but you're free from taxes once you retire on this money.

20. This is why I always recommend to my clients generically to contribute to their 401k JUST up to the limit to get the match, and then put the rest into a vehicle that can be used tax-free.

Yes, there are exceptions based on circumstances, but this is the general rule.

21. So, because you're paying taxes on the seed (the contribution) rather than the harvest (distribution) that is why I recommend Roth IRA's for my clients

ORRRRRRR.........

22. It's also why I recommend properly structured cash value life insurance.

Guess what?

THAT is where Congress got the idea for the Roth IRA in the first place.

But, that is a discussion for another day.

23. Anyway, you may be saying to yourself: "Damn, I have a Traditional IRA, but I want to convert it to a Roth IRA and just get the taxes over with, but I'm not sure what to do next."

24. If you're saying that, pay attention to Part 2, where I'll show you exactly how to do it strategically.

End for today.

And sorry about the typos, if there are any.....I have to jump into a meeting, and I wanted to get this out.