Can a Roth Conversion Still Make Sense if the Taxes Are Paid With Converted Dollars (Instead of Other Sources) |Weekly Wednesday Wisdom Webinars

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Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm to register or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

In this week’s webinar, Attorney and Advisor Chris Berry of answers the below questions.

  • 0:00 Introduction / Positive Focus
  • 4:11 Can a Roth Conversion still make sense if the taxes are paid with converted dollars(instead of other sources)? Follow up, are dividends and interest in a Roth added to MAGI (for SS/Medicare)?
  • 17:31 Finding help to provide day-to-day finances? I understand the role of financial POA and trustee for incapacity, but it seems like a lot of work to manage day-to-day finances. How does someone go about getting all the credit cards paid, bills paid, RMD’s, figure out, etc.

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Episode Transcript

All right. Looks like we are now streaming. And give me one more second. A few more buttons again, if you do have a question. Really, this is driven by questions you have. So feel free if you have a legal, financial or tax question, that’s you’d love an answer to. Please put it in the Q&A, and I’ll take a shot at answering it live on the fly. And second, as I hit these buttons. All right, and then I’m going to share something into the chat where if you appreciate what we’re doing and the information we provide, you leave us a nice five star review if you think we deserve five stars. It certainly would be appreciated. And with that, we’ll go ahead and get started, so my name is Chris Berry, a certified elder law attorney and fiduciary, a financial adviser with Castle Wealth Group, and I just saw my positive focus. It’s a professional one. I’ve been a financial planner for a while, fiduciary financial planner for a while, but I was able to finally sit down and take the CFP Test Certified Financial Planner Test, which is the top designation you can receive as a financial planner. So in addition to having the top designation as a state planning, another law attorney, which is the Selah designation certified law attorney, I also have the CFP designation probably well within a week once it’s made official. So that’s pretty exciting. So there’s maybe two of us in the state of Michigan and a handful of us across the nation who are both certified elder law attorneys and certified financial planners.

And we think it’s important because what we talk about from a legal perspective also can have effects from a tax perspective and from an investment and financial perspective as well. So all these pieces really fit together. And I was talk about it like the legal structure. A lot of times we build is the chassis of a car and then the financial and tax piece is the engine that we drop in. The car actually have a barrier. So if we look at this as a race car, right, we wouldn’t want to have like a minivan engine inside of that race car, right? So all these pieces need to fit together. And too often at least what I’ve found is that the legal plan doesn’t match the tax plan, doesn’t match the financial plan. And so that’s one of the reasons we brought everything together to offer legal, financial and tax planning all under one roof. And so getting that CFP is just a top designation you can get. So it proves that kind of proof of concept and proves that I know what I’m talking about on these. So. So that’s my positive focus. That’s pretty hard test, right? Harder than the CPA exam, but probably just as hard as the bar exam. So it wasn’t wasn’t easy.

There’s a lot to it, but say it passed. So that’s behind me. So that’s my positive focus. And with that, I’ll go ahead and share my screen. And we will get into why you’re really here. All right. I hit that button, I hit this button and I hit that, but. Oh right. And again, if you do have a question or if something is unclear, feel free to put it in the Q&A section. And with that. All right. So first question. It’s really it’s a two parter. It’s about Roth conversions. So and this is really a hot topic with all of our clients. I’d like to be honest, I’m pretty booked through the next month or so just meeting with existing clients and talking about tax planning for the end of the year. So can a Roth conversion still make sense of taxes are paid up with converted dollars instead of other sources and a follow up question or dividends and interest in a Roth added to modified adjusted gross income, which can have effect on Social Security and Medicare. So just taking one step back, this is a conversation I had many times we look at these different tax buckets. And so we have taxable or I just call it non-qualified. So this is like your checking savings brokerage accounts. Then we have our tax deferred. Or sometimes called tax infested because you’re still in partnership with the IRS. So if taxes go up, the value of these accounts go down.

Here’s your for one case I raise four for three BS. And then. We have our tax free accounts. So these are accounts that grow tax free, easy one is the Roth. A little more complicated is the index universal life. Then we have 529. They have to be for education and health savings accounts. And I’ll tell you right now, if you have. Anywhere approaching a million dollars of pre-tax accounts, if you have money in this account, you need to have a tax planning strategy because we know taxes are going up. So that’s why this has been a very common conversation we’ve had with people is they know they need to get money out of these four one KS IRAs for three BS because we know taxes are going up and if if taxes go up, the value of those accounts go down. So what a lot of people are doing is looking at, OK, let’s look at doing Roth conversions. Yeah. Now ideally when we do a Roth conversion and I had a conversation with clients today about this, for they did about $1.6 million Roth conversion, and I’m not saying everyone should rush out and do this all in one year. But they did that, and what we did is from both spouses accounts, we move the 1.6 they had pretax to the Roth. Now, what that creates is a tax burden. So where is the tax going to come from to pay for that conversion? Ideally, it comes from over here, because by doing it this way, they now have repositioned 1.6 million tax free.

So that’s where ideally taxes are paid with other sources. So ideally, we pay the taxes on a conversion. From this account, because what is the best type of money now if you think taxes are going up in the future? Tax free, so we want to fill that bucket up as much as possible. Second, best is here. And then third, best or worst is here, right? And so if I can get more money in the tax free bucket now, if we pay the taxes that lowers the amount over here, that’s still good because we’re maximizing that tax free bucket. But what’s another way that we could do it? Well, maybe you don’t have the cash sitting in that nine qualified account to pay for the Roth conversion. So ideally, we pay it from other sources, but what if we can’t do that? Well, then what we could do is we could convert instead of, say, 1.6, and I’m just making up numbers. I’d have to do the math. Maybe a million goes here. And then 600 goes here. And then the taxes are paid. The net effect of this is now instead of having 1.6, we have one million here, but we didn’t have to spend additional kind of non-qualified accounts. It all came from that.

I’m. Tax deferred bucket, so yeah, depending on the situation. A Roth conversion may still make sense, even if you’re using converted dollars to pay for the taxes. I’d say conditionally, yes, I would say it’s still something to be explored again. Anything I say today, I understand its general advice. Everyone’s situation is a little bit different. I’m not saying everyone should run out and liquidate their whole tax deferred account all in one year. You need to weigh the pros and cons of it. But in their situation, getting to the zero percent tax bracket for the rest of the retirement really appealed. So that’s what we did in their situation and also understand that it’s not just Roth conversions. Another thing that we’re doing for them is also filling up kind of the two different big tax free accounts, Roth conversions and then the index universal life. Both of these offer tax free growth. The Iall a little more complicated, but it can also offer some additional benefits, it can offer a long term care benefit or a tax free death benefit, plus you have the power of indexing. So if the market goes down, you don’t lose anything. Downside of the IONAL more complicated takes longer. But should be something that’s explored, so don’t just default to the Roth conversion, even though that’s probably the simplest. And then the follow up question are the dividends and interest in the Roth added to modified adjusted gross income? Short answer is no.

So that’s what makes everything inside of this tax free bucket. So. Friggin cool. Because understand that it’s not just about the tax you pay. You also have to look at the implications of where your adjusted gross income is falling, especially as we see President Biden’s previous proposals to say people in the highest tax brackets will have to pay additional taxes or or suffer these additional consequences. Well, guess what? It’s a slippery slope if he’s starting that at 400000, what’s not to say that it drops down to two hundred or 100000? And when you factor in Social Security and taking out RMDs from here and then maybe if you have a pension, there’s a lot of people that fall in that $100000 income bracket or they get near the top of that. Now they have to pay additional Medicare premiums for the rest of their lives. So understand that. It’s not just about the tax you pay, but it’s also the additional consequences of where you fall in that tax tax bracket. And I do this often, but I want to assuming it kind of pulls up here. Come on. That’s not pulling up. Give me a second. Doo doo doo doo doo doo doo doo doo. Just a second. Where’s my key data? Well, that’s that point up, but the point here is that your adjusted gross income also will affect whether your Social Security gets taxed and at what percentage.

And then also will affect whether you pay additional Medicare premiums. So the goal is to keep during retirement. This number is low as possible, and that’s where we have these different tax brackets of 10 percent, 12 percent, 20 to 24 30 to 35 37, right? So the 12 percent tax bracket maxes out about eighty thousand twenty two maxes out at about one point seventy six for a married couple. Twenty four maxes out about 326. And then it just goes up from there. And so it’s not just about the amount of tax you pay, but also understand the consequences for the rest of your retirement. So like I mentioned with that client who’s pulling a big chunk out this year, what they’re going to be for the rest of their retirement, they’re going to be in the zero percent tax bracket. So if the government decides to put additional premiums, make you pay additional premiums for Medicare or tax your Social Security more because you’re in higher tax brackets, well, guess what, the rest of their retirement, they’re in the zero percent tax bracket. Now, so we always kind of default is a no brainer to maximize the 24 percent tax bracket these days because we know this is going to 28 percent when the Tax Cuts and Jobs Act expires and this is going to 25. And this is scheduled to happen in 2025, if not sooner.

But if you look at kind of the rest of your retirement and what you leave to the next generation, sometimes it does make sense to jump up tax brackets. So for clients I was meeting with today, they’re going to be at the zero percent tax bracket for, let’s say, they live to 100 next 44 years and then what they leave to the kids. Guess what, zero percent tax on that as well. And so if there are changes to Social Security, where they reduce or tax your Social Security or you pay additional Medicare premiums based on your income, they don’t have to worry about it. So, yeah, that’s the magic of the tax free. Bucket, is that anything, whether it’s dividends, interest, you don’t have any capital gains or anything in that tax free bucket. So if there are things concerns about Social Security or Medicare changing in the future for them changing the brackets, if we plan properly, you don’t have to worry about it or you should be less concerned. So that’s what again, I think one of the biggest risks and opportunities right now is tax rates, and I don’t think enough people have really considered the ramifications. And along with that, tax risk is also legislative. Rick’s risk. Right, they can change the laws on us. And now if we’ve repositioned ourselves in a lower tax bracket for the rest of our retirement, we’ve not only eliminated to a certain extent tax risk, but also legislative risk where they’re going after.

Maybe they’re going after like right now, if you’re in the 24 percent tax bracket, you’re going to pay additional Medicare premiums. What’s not to say if you get lower or 22 percent tax bracket right now, your Social Security is getting taxed right versus if you’re in the 10, zero, 10 or 12 percent, your Social Security is untaxed. So again, that’s where, especially with what we see with President Biden’s proposal, he’s not only do we have like Social Security, getting taxed if you’re in the twenty two percent tax bracket, your Medicare premiums going up in the twenty four percent tax bracket, but now he’s adding additional taxes to when you get up here. But again, what’s not to say that these numbers start dropping even further? We’re now they’re coming after the 12th or the. So again, I think a big risk is tax risk, and that’s why we’re so busy with end of the year tax planning and then going along with that moving forward. Given that we’re basically $30 trillion and $30 trillion in debt, I think legislative risk is also a big issue moving forward. So, yeah, not just Roth, but anything tax free. That’s really where you want to try to get as much as of your funds as possible. And we can help you with that, and that’s what we’ve been spent spent a lot of time doing.

All right. Next, Lulu. Let me see if I have any questions. Let me pop out real quick. Here something in the chat. Uh, is your tax return? Medicare Premium is our tax return yearly, determine Medicare premiums for the next year. Yeah, so the question is for Medicare premiums. Your Medicare premiums are actually two years lagging, so what you’re paying for in your 2021 Medicare Premium is actually looking at your adjusted gross income for 2019. So let’s say you do a big conversion this year. Well, guess what, 2023, your Medicare premiums will go up. And then if that’s the only year you do it, then in 2024, your Medicare premiums drop back down. So, yeah, your Medicare premiums are kind of two years in the past. So what you’re paying for, twenty twenty one is based on what you did in 2019, and it changes every year so it can drop back down. So again, those clients I’m working with today, their Medicare premiums in 2023 is going to go up for the year and then for the rest of their retirement, it’s going to be the lowest possible. So hopefully that was helpful. All right. Hit this button. Make sure you’re collecting every question coming in. All right. All right. On to the next question. And again, if you do have questions, feel free to put it in the chat or the Q&A because I only have one submitted question left. All right.

All right. Ok, so finding help to provide day to day finance. Understand the role of financial power of attorney and the role of the trustee during capacity, but it seems like a lot of work to manage data finances. How does someone go about getting all the credit card paid bills paid RMDs for get out, et cetera? Right. So. When we talk about, like legal structures, when we’re talking about like disability. Incapacity, we call these disability documents, so these are the kind of the legal structures you should have, you should have a financial power of attorney. This appoints someone to make financial decisions. You should have a medical power of attorney who’s going to make medical decisions. And also we recommend having a care plan. So if you’re to need long term care, have you mapped out what that would look like? And then along with that, we have a trust. And sometimes people think about trusts is just OK, avoiding probate upon death, but with a trust kind of think of it like a piggy bank. If you get to the point where you can’t manage your own financial affairs, you could pass that piggy bank on to someone else to manage for you. And that would be the role of what’s called a successor trustee. So you’re still alive, but you just hand off management to someone else. So all of this creates the legal authority to be able to handle things.

But what this question is asking is, OK, that’s great. But there’s a lot of things that need to be done on a daily basis, like handling credit cards, paying bills like cable bill, all that stuff. So how do you get that done? Well, typically that’s going to be either the trustee or financial power of attorney is going to be in charge of making sure that happens. And so I would say most often, what are our options here most often is they just get it done. This is where maybe now one of the kids moves in with you. You move in with one of the kids or or the kid has all the bills forwarded to their mailbox and they just get it done. And yeah, that’s where we talk about what’s called the sandwich generation of, OK, you’re trying to run your own family, but now you’re managing mom or dad as well, as well as maybe having younger adult children, right? You’re kind of managing two households. So that would be probably the way it’s done the most often, and that’s probably the cheapest way to go. And really, everything in life is either time or money. And so kind of the higher you go this way, it’s more of spending time. This way it’s you’re more spending money to get these things done. So really just kind of one of the things I find is every everything in life is either time or money.

So if you have the time, then you’re just going to figure out a way to get it done. And whether it’s you have the mail forwarded or or whatever it may be, you set up the automatic payments and you monitor it just like you monitor your own stuff. A second option. Is that we see is there and this is a lot less common. There are what’s called daily money managers. Also, kind of bookkeepers you can hire. So they’re not like an accountant or anything like that, but there’s someone who who balanced his books right at the end of the day, that’s really what it is. It’s I’m running a household. From a financial standpoint, it’s not very different than running a business. You have an inflow, you have an outflow, you’ve got to make sure all the bills are paid. So what a financial power of attorney or trustee could do is they could hire one of these people and then. And I’ve seen that happen. That’s going to cost a little bit more money. And then depending on the size of the state, then we get into more of like CPA accounting firms or what we call kind of family offices. Where you have a set of professionals CPA, which we have on our team, kind of the lawyer, I serve that role, the financial planner or CFP. And that’s kind of what we’re creating at our office is this idea that all these roles are filled and a lot of times what we would do is just kind of pawn off some of the day to day stuff to like one of the bookkeepers or someone a little bit less expensive in terms of handling the day to day finances.

But I would say a majority of time people just find a way to get it done. Maybe they offload some of the work to say a bookkeeper. I haven’t I get I get a little worried with these people that advertise themselves as daily money managers, I just feel like unless you’re having someone kind of watch over them, there’s a big chance for even if they’re a professional, some fraud there. So I’m a little hesitant with kind of the name Daley Money Manager, bookkeepers I feel a little bit more confident with. But really like CPAs in terms of kind of just managing the day to day accounting, that’s where I’d feel the most comfortable if we’re spending money because they’re putting their professional licensing on the line versus someone who like someone who holds himself out as a daily money manager. Like what licensing do they have? Or even a bookkeeper? Not much, if any so versus I was working with a family. They had a CPA that’s worked with them for 25 years, and he kind of handles a lot of the day to day stuff. And he’s part of a big firm like he’s not he’s not going to do something he shouldn’t.

He’s going to lose his professional licensing, plus the fraud and jail that goes along with it. So yeah, it’s a pain. But I would say a majority of the time people just figure out a way to get it done one way or another, whether they’re forwarding the mail or setting up automatic payments, that type of thing. So. So there we go. And that is all I actually had submitted this week. So if you do have any other questions, feel free to put it in the Q&A. Otherwise, I guess the biggest thing that I’ve been seeing lately. Is concerns over inflation, so I don’t know if you saw the latest news. Social Security is going up, I think five point nine percent next year. You look at gas, everything is increasing in prices and so a big concern in addition to some of the things that we’ve talked about. And I just saw a Wall Street Journal headline right before I hopped in. Is this concern about inflation and not to get political, but it’s something that I don’t think President Biden had incorporated or government has incorporated. So when we look at what’s happened with the pandemic, there’s a lot of kind of pulling rabbits out of the hat to keep the economy going. And a big concern is now inflation and what are going to be the ramifications of that.

So a big thing just from what can I do about it? Standpoint is looking at money you have sitting in cash and understanding that if you’re not keeping up with inflation, you’re kind of going broke slowly. So looking at ways to try to protect your money but still keep up with inflation is, I think, going to be a big concern moving into the new year because we haven’t had a 5.6 percent or five point nine percent Social Security increase. And I don’t think since like 1980 or something like that, on average, it’s 2.6 percent, I think, over at least the last 20 years. And we’ve had some years where as a zero percent tax or Social Security increase. So that’s something a little worrisome is looking at inflation. And I just throw that out. There is something that we’re monitoring and it might be a good idea to if you have a lot of money sitting in cash, understand that that might not be the best place for it if you’re not using that cash over the next year. So something else to think about. And with that, I will say thank you so much. Make it a great week. If you’ve like what you heard, feel free to leave us a lovely review if you don’t like what you’ve heard. Feel free to email me and tell me why you don’t like it. But with that, thank you so much. Take care. Bye bye.

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