Roth Conversions - Smart Strategy or Costly Mistake

Your Retirement Guide Podcast with George Jameson, CFP®, MBA, founder of Capital Wealth Group in Columbia, SC.

In this episode, we dive into how fear around rising taxes in retirement is often overstated, why timing matters with Roth conversions, and how to plan deliberately to keep more of your hard-earned money.

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe & leave a review. If you'd like a free 30-minute retirement review, visit our website at www.capitalwealthplan.com to schedule.

This is for education only.It is not tax, legal, or investment advice. Before  acting on any information consult your tax, legal, or investment advisor.

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Capital Wealth Group is a Fee-Only Advisory Firm located in Columbia, SC , serving clients locally in South Carolina and North Carolina and virtually nationwide.

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Transcript

Speaker: 0:19

Hi, and welcome back to the show. I'm George Jameson, certified financial planner and founder of Capital Wealth Group in Columbia, South Carolina. There's a fear spreading fast in retirement circles that if you don't act now, taxes will skyrocket in retirement and you'll be left holding the back. And that fear is driving people into Roth conversions at a pace we've never seen before. But what if I told you. That some people are weaponizing that fear pushing you toward Roth conversions that may not be in your best interest. In this episode, we'll unpack why the future of tax rates is far from certain why fear-based advice should raise big red flags, and how to figure out if a Roth conversion makes sense for you based on your own numbers, not just headlines. So let's dive in. So number one, the fear factor. You've likely heard it before. Taxes have nowhere to go but up or convert to a Roth now or regret it later. Polling by Pew Research in March, 2025 found that 56% of Americans feel they already pay more than their fair share of taxes. That makes it politically unlikely we'll see sweeping tax hikes anytime soon. Also, the one big beautiful Bill Act made the Trump era tax cuts permanent. So unless a future Congress changes the law, today's tax brackets are likely to stick around for a while. So the real question is, how will your taxes change throughout retirement? Will they go up, down, or stay the same? For some retirees required minimum distributions, also called RMDs, which begin at age 73 or 75 may push you into a higher tax bracket. For others, not so much. You also have to think about what's often called the widow's tax. It's not a real tax, but it can feel like one. After losing a spouse, you'll file a single instead of married. Which usually means a higher tax rate. You'll only get the higher of the two social security benefits and you'll lose one standard deduction, and you also might pay more for Medicare premiums. Now, if you don't need the money in your pre-tax accounts and you're planning to leave most or all of it to your heirs, here's the question. What tax bracket are they in? If you want them to keep as much as possible after taxes? You could choose to pay some or all of the taxes now in the form of conversions, so they inherit it mostly tax free. Of course. I also have clients who say, I don't care what the numbers say, my kids get whatever's left and if they have to pay taxes, so be it. So who benefits and who doesn't from Roth conversions? Roth conversions can be powerful, but they're not a one such fits all. Let's break it down by those still working in their fifties, and then by three retirement asset tiers. So if you're still working in your fifties, this actually can be a good time to do Roth conversions, especially for strong savers with modest incomes. Roth accounts shine when they have time to grow for higher earners. In high tax brackets, of course it's less likely to pay off. So tier one. Under 500,000 in pre-tax retirement assets, about 90% of retirees fit in this tier. If you're about to retire or already retired with less than 500,000 in pre-tax assets, Roth conversions may not make sense here. If all your money is tied up in pre-tax accounts and you need withdrawals right away in retirement, the benefits do shrink. However, if you have taxable savings to pay for the conversion taxes, it actually may make sense to do raw conversions during the sweet spot right after full retirement and before RMDs kick. In another scenario, in this tier, if you have high guaranteed income, like a combination of social security pensions or even rental income, that will exceed your pre-retirement income, a conversion may make sense. However, please keep in mind it's always worth modeling a conversion in any tier, and it should be part of your overall comprehensive retirement planning process. Tier two, 500,000 to 2 million in retirement assets. This tier is about 5% of retirees. Here a Roth conversion often pays off, but not always. So here are some conditions, number one. Those still working in their fifties or early sixties, it may make sense to go ahead and do Roth conversions depending on your income. Number two, gap retirement income period. This is often the ideal time to do Roth conversions for retirees, even after starting social security. It's usually best if you have enough after tax money or investments to live on and to pay the conversion taxes. And then number three, after tax conversion funding, do you have enough non-retirement savings to pay the tax bill on the conversion so you keep your taxable income and thus your bracket as low as possible? This isn't always a deal breaker, but it does make a big difference with determining if, if conversions make sense for you. Then number four, future tax disadvantages. Are you planning for potential widower tax penalties? Don't even need your pretax funds to live on and want to leave it to heirs in the most tax efficient scenario. Or are you expecting a big spike in Medicare Irma surcharges, again, always model Roth conversions as part of your overall retirement planning process. So tier three over 2 million in retirement assets. This is less than 2% of retirees. Large pre-tax portfolios usually guarantee hefty RMDs. So why Conversions often make sense here? Lower tax rates early in retirement before RMDs kick in is the prime time to do Roth conversions. The ability for you to pay taxes from non-retirement funds and estate planning benefits when leaving assets to heirs. But when it may not be ideal to do Roth conversions in this tier, you plan to use qualified charitable distributions, also called qds for a lot or most of your RMDs. And then if you need the RMD income to cover your lifestyle starting day one of retirement, even here, it may make sense to do Roth conversions. Which is why every retiree, no matter what tier, should run the analysis as part of their retirement planning process. So what's an action plan? I highly recommend working with a retirement focused financial planner using sophisticated software like Right Capital A. Proper analysis will show exactly if, when, and how much to convert and the tax savings you can expect. Then you can make an informed decision about whether to pay more taxes now or later, and how much so in a world where simple, urgent calls to action dominate, it's easy to think tax free money is always better, but real retirement planning isn't simple, it's deliberate. Roth conversions can be a powerful lever, but not always. The next time you hear, convert now or you'll miss the boat. Start with a full holistic retirement plan and then make an informed decision. Want to learn more if you'd like a deeper dive into the math, myths and truths of Roth conversions. Let's set up a time to talk, free and no obligation. I'm even considering offering free access to right capital's planning software. If you're interested, please reach out. I also do one-time retirement plans, which include Roth conversion analysis. For those DIYers who manage their own investments. I can work with you in person or virtually. Your retirement deserves more than fear-based advice. It deserves clarity, logic, and a plan built around you. Thanks for listening. If you found today's episode helpful, please subscribe, leave a review and share it with a friend who's nearing retirement. I'll see you next time. Until then, happy planning and have a great day.