A RETIREMENT expert mapped out the key to a couple’s financial success.
YouTuber James Conole is a Certified Financial Planner (CFP) who educates his subscribers on how to make the most of their money.
He illustrated what’s called a Roth conversion, using a couple named David and Lisa as an example to explain how much they could save.
If the right conditions are met, a Roth IRA retirement account can build significant savings without applying tax deductions.
“Understanding the tangible impact and the critical factors of Roth conversions is essential,” the video description reads.
Conole explained how David, a 58-year-old, and Lisa, a 57-year-old, both aim to retire at 62.
He revealed the couple’s combined net worth, which was $4,006,527.
“They have a fairly significant net worth, and not just a net worth that’s significant, but a lot of their money’s in pre-taxed accounts,” he said.
He said five factors can determine whether a Roth IRA would help them reach this goal.
1. CREATE TAX PLANNING WINDOW
First, Conole said David and Lisa have what’s called a “tax planning window” which falls between the time they retire and when required distributions start.
“When you’re working you have a high income, and when required distributions start, if you have a lot of money in pre-taxed accounts, you also have a high income,” he said.
Console noted how the couple could also have Social Security, dividends, or capital gains.
“What you’re trying to do is say in that tax planning window, between the time you retire and the required distributions start, can you do some good conversions?”
The conversions involve taking a traditional or tax-deductible IRA and putting it into a Roth IRA.
2. EVALUATE INCOME
The next step is analyzing how total income corresponds with expenses.
In David and Lisa’s case, they wanted to spend $10,000 a month.
Assuming $10,000 a month adjusted for inflation, the couple would need to look at their income sources.
David’s annual salary is $100,000 and Lisa’s is $50,000.
Plus, they need to add the Social Security benefits they get.
While David would get $3,600 a month from Social Security once he reached 67, Lisa would get $1,000 at age 67.
On top of those income sources, David would get a 401K benefit from maxing it out at a 3% match.
While Lisa doesn’t have a 401k benefit, she was still able to max out her traditional IRA.
“They’ll both continue doing this from right now until the age that they retire at 62,” Conole said.
He also noted how because they invested aggressively or maxed out their retirement accounts, they can expect an 8.7% rate of returns on their investments between now and retirement.
3. CONSIDER CASH FLOWS
After evaluating income streams, Console said the couple would be wise to focus on where their future cash flows would come from.
They wouldn’t be making their previous incomes once they retired, plus they’d have to consider how their Social Security benefits wouldn’t kick in until 67.
“So you have some gap years here where you don’t have any outside income. What we compare that to is your expenses,” Conole said.
One of the biggest expenses comes from living or property costs.
Assuming the monthly cost of living for them is $10,000 or $120,000 annually, they would need $140,000 for a year after a 3% inflation rate is applied.
Conole said a general rule of thumb is the less someone has in their pre-tax accounts, like 401ks or traditional IRAs, the less impactful a ROTH conversion will be for them.
He projected the couple would need a net flow of $147,585 to meet their income needs each year.
4. FIND A WITHDRAWAL STRATEGY
Conole shared a reflection of David and Lisa’s account balances at the end of 2023 and its projection for when they would retire in 2027.
“When they retire, they’re projected to have $617,450 in their taxable account and that’s $5.2 million total,” he said.
But to get the right tax strategy, the couple needs a withdrawal strategy too.
“To start, what if you take everything from the taxable account first?” he asked.
This could put the couple in a lower tax bracket.
So for the first several years of their retirement, they’d be fully living on their tax account.
5. CONSIDER TAX BRACKETS
Since they’d only be living on the taxable account, a lot of which they already paid taxes on, they’d be able to fully meet their income needs while having a 0% tax bracket.
Once their Social Security kicks in, they’d be put into a higher tax bracket which they’d need to account for.
Conole suggested the couple could fill up their tax bracket during any year they were under a 10% tax bracket to manipulate the conversion to their advantage.
“We’re now covering just enough to fill up the 10% tax bracket,” he said.
Doing this would add $335,886 more to the tax-adjusted ended portfolio balance than if they hadn’t done any conversions.
If they filled up the 12% tax bracket, it would drive down their taxable income in their retirement years to get them $752,770 more.
So having fewer assets in their traditional IRAs could benefit them in the long run.
“The goal here of course is to find what the optimal conversion amount is,” Console said.
Filling up a 22% tax bracket would get them to $1,130,999. But Console noted how it’s possible to convert too much, so finding a sweet spot is essential.
For instance, filling up a 35% tax bracket would backfire and save the couple fewer dollars because they paid so much in taxes upfront.
If the couple was able to shave off $1 million in taxes they would’ve paid by striking a balance with filling the 22% tax bracket.
“It does take discipline, and it takes some work because what you’re doing is you’re willingly writing a check for $40,000 in some of these years that you otherwise didn’t have to write,” Console said.
The U.S. Sun has more retirement perspectives, as a woman realized her solution hinged on an “excruciating” chat with her husband.
Meanwhile, James Canole revealed how another couple saved $595,000 in taxes.