Wealth Podcast Post

Roth Conversions with Jay Beattey

George Grombacher March 25, 2022

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Roth Conversions with Jay Beattey

LifeBlood: We talked about Roth conversions, understanding all the different variables to consider, how to think about your partnership with the government, what the total cost on your money is, and how to get started, with Jay Beattey, CEO of the Velomon Group. 

Listen to learn why you need to be thinking about the future of tax policy!

You can learn more about Jay at Velomon.com, Facebook, and LinkedIn.

Thanks, as always for listening!  If you got some value and enjoyed the show, please leave us a review wherever you listen and subscribe as well. 

You can learn more about us at LifeBlood.Live, Twitter, LinkedIn, Instagram, YouTube and Facebook or you’d like to be a guest on the show, contact us at contact@LifeBlood.Live.

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Our Guests

George Grombacher


Jay Beattey

Episode Transcript

Come on one level, this is George G. And the time is right to welcome today’s guest strong, powerful. Jay Beatty. Jay, are you ready to do this?

Unknown Speaker 0:18
Ready, George? Let’s do it.

george grombacher 0:20
Let’s go. Jay is the CEO of development group, their organization promoting financial wellness, it’s always great to have you back on. Jay, tell us a little about your personal life smart about your work, why you do what you do?

Unknown Speaker 0:34
Well, my wife and I live in Indianapolis, I’ve done this for about the last 20 years after about 20 years, kind of on the corporate hamster wheel. I tell people, the money world to me was like what the piano must have been to Mozart, I can’t really explain it. But I sort of got it. And so I’ve had a lot of fun researching learning. And now teaching others writing books and doing some speaking to try and get people a little bit more information in areas of personal finance that are going to be important to

george grombacher 1:05
nicely appreciate that. People don’t necessarily understand it. It’s not it’s not that innate thing that you necessarily have. Or if they do they prefer not to sit down at the piano to play it. That’s right. That’s right.

Unknown Speaker 1:20
Yeah. Yeah, there’s, there’s there’s a lot of lack of knowledge. And then there’s a lot of resistance to the acquisition of knowledge, I find when it comes to money, it’s kind of one of those, I don’t know, necessary evils for a lot of people that just assume get swept by the the door more often than not.

george grombacher 1:40
And we find ourselves, I remember, learning about why 401k is work the way that they did some probably 20 years ago about how the thinking was when you’re in your high income earning years, you want to defer a bunch of taxes, because when you go to retire, there’s going to be less tax brackets, and you’re going to be making less, you’ll be able to drop down a bunch of them. Not necessarily where we’re at today. Right. And I know that you’ve been thinking and working on traditional IRA Roth IRA, tell me a little bit about that.

Unknown Speaker 2:12
Yeah, I mean, I think I think what you said made some some logical sense back then, but, but that that relied on the sanity of our political system to make things come out that way. And it’s quite a bit different. I mean, most people find that when they get toward retirement, they lose some of the deductions they had when they were younger, you know, typically the mortgage is paid off or close to paid off, the kids are grown. Some of those deductions go away, not to mention what’s happening within the tax realms, and they find that they’re actually in are going to be in a higher tax bracket in retirement. So some of the logic that underpinned the benefits of the 401k, and IRAs and so forth, has sort of turned upside down. And so what what I’m finding, and it, you know, frankly, it’s largely among people that are in those pre retirement years, kind of 50 to 60. But also, I’m getting a lot of a lot of attention from younger people who realize that holy smoke, I may have, you know, 20 3040 years of runway in front of me before I get to that point, but my goodness, at the current rate taxes are likely be astronomical, what options do I have, because everybody keeps pumping the same smoke at me with respect to IRAs, 401, KS, four, three B’s, and so forth. So we’re having a lot of conversation about conversions and alternatives. And I think there’s, as I began to kind of think through that, I think there’s there’s quite a bit that people may want to know that perhaps they don’t. And so that’s, that’s kind of where the focus of our attention has been lot lately.

george grombacher 3:51
Nice. Yeah, I think it’s nothing but a positive thing. And whatever it is, sort of causes people to say, oh, my gosh, it seems like we’re not moving in the right direction. And what’s that going to mean? For me? Maybe I better actually put my hands on the wheel and, and educate myself. So in terms of conversions, what are you? What are you talking about thinking about there?

Unknown Speaker 4:20
Well, I think, you know, the starting point that we try to have with the people we work with, is that the conventional wisdom is out there that my gosh, yeah, I’ve got an opportunity to convert my traditional plan, whether it be a 401k or an IRA to a Roth. But if I do that, I’m going to have to write a big honkin check to the IRS. And that’s going to mean I’m going to end up with less money and less buying power in the future and my money is not going to last for the rest of my life at cetera. And so I think the starting point of that conversation, George is to is to debunk those those myths. The reality is that if you’ve got a 401k statement Got a number on it, you don’t own that number, you own a portion of that number. The rest is owned by Uncle Sam, it was owned by Uncle Sam the minute it went into your account, and it’s never going to be yours. So there’s not a cost of conversion, I tell people, it costs you nothing to convert a convert you you, you think of your 401k as a sole proprietorship, it is not it is a partnership, it’s a partnership with the government. And a decision to convert to a Roth is really a decision to dissolve the partnership, where each partner walks away with their ownership of the assets that they own. It goes their separate ways, that’s all it is. If if I’ve got a million dollars in an IRA, and I convert it in, I’m left with pick a number seminar and 50,000 left over whether I had the million or 750, they both buy the same amount of goods and services because I got to pay tax on the million, I’m going to end up with 750 Anyway, so there really is no cost. Now the 750 that I’m left with, if we use that number, if I take a percentage of that out each year as my income in retirement, it’s going to last just as long as if I took the same percentage out of the million. So there’s no reduction in in the longevity of my income, the ability for my money to last the rest of my life. So if there’s no cost, there’s no reduction in in purchasing power, the after tax purchasing power, and I’m not going to run out of money any sooner, one way or the other, then then we get to that now we got a starting point to have a conversation from and I think the next thing that we got to look at then is Okay, is there a cost of not converting, and this is what nobody, at least, you know, that I see is talking much about. And I think there are two or three measurable hard costs of not converting. And then there’s some soft issues that bear on the conversation also. So for example,

Unknown Speaker 7:08
in that million dollar account, if if the fee and commission drain, let’s say is 2% of the account balance a year, which would be somewhere in the average of what most the experts think we’re ultimately paying, then I’m paying $20,000 a year to have that money managed. The problem is I don’t own all that money. If I own three quarters of it, then $5,000 of my $20,000 in annual fees, I’m paying on Uncle Sam’s money. And I’ve been doing that every year, I’ve been participating in that plan up till now. So if I don’t want to start voluntarily paying brokers and advisers on money that I’m never going to own, that may be a good reason to convert. If I’m that million dollar account holder, and I’m going to live 20 years in retirement, I’m at retirement doorstep, I’m live an average of 20 years in retirement, there’s $100,000 that I could use for myself and my family that I don’t have to send off to brokers and advisors, that’s a hard cost. A lot of times the income that I would take out of a traditional IRA in retirement is going to trigger the taxation of my Social Security benefits. If I didn’t have that income, if I were taking money out of a Roth plan, it would not trigger at the taxation of Social Security. Well, that can be another five to $10,000 a year in taxes that I could save by converting over 20 years, again, real money. So I’ve got those two hard costs. Also, most people don’t know or understand or realize until it’s too late to do anything about it. That money drawn from a traditional plan, like an IRA can trigger a higher means tested Medicare premiums. So that’s a potential additional cost. So you’ve got those three areas of potential additional costs, not to mention what happens if tax rates were to go up in the future. And in addition to that, you got to think about things like, you know, forced taxation through RMDs required minimum distributions that you may not need starting at age 72. And you got to think about the fee and tax liability you’ll pass on to your heirs and estate, if you don’t complete, you know, conversion during your lifetime. So I know I know it packed a lot in there but there’s an awful lot of reasons to really think about Roth conversion and some of them aren’t as obvious as what some of the more well known pundits out there would have you have you think

george grombacher 9:37
nice. Yeah, I appreciate all those very much and that certainly does make sense I love the the the analogy about your thinking your 401k is a sole proprietorship it’s just you but it is in fact a partnership between you and and and the government. They could that’s a great way to think about it and that your conversion is just a dissolution where both parties walk away with the interest that they’re legally entitled to? And you’re essentially, then you are really starting your sole proprietorship, which is great. And that if you’re not doing that all the fees and the expenses that you’re paying, you’re also paying on the government share that they’re not doing that. So that doesn’t make any sense. And then yeah, the second level things about income taken from an IRA versus a Roth, its impact on taxation of Social Security, Medicare means testing, and then the RMDs and, and potential inheritance, those are all those are all very, very compelling reasons to, to be paying closer attention to this.

Unknown Speaker 10:45
Yeah, there’s no no question. But I think you know, to, to get into a conversation, to be able to have an honest assessment or an honest conversation with yourself about whether you should convert or not, you got to start out with that premise that it costs nothing, it doesn’t reduce lifestyle, and it doesn’t reduce the longevity of your income. If you can’t get your head around that, you’re never going to be able to swallow the idea of writing a six or seven figure check to the IRS. Now, if you can get your head around that, then you got to ask yourself, Okay, what do I think the future taxation is? If I think future taxes are going to be lower? Heck, keep it in its traditional form. But I think if I think there, it could go higher, or there’s a risk that it goes higher. And by the way, George, if taxes go higher, and I’m in retirement and largely on a fixed income, where does the money come from to pay those higher taxes, it comes dollar for dollar directly out of lifestyle. So if you think that’s a risk that you’d like to take off the table, then conversion might be an option for you. If you think you want to keep quit, you know, having the fee and commission drained of paying on somebody else’s money, conversion is an option. If you think that if you don’t have a traditional pension plan, or something else that could trigger the taxation of Social Security, then conversion is an option. But you got to get that the hard part is getting in your head first, that there’s no cost, there’s no reduction in lifestyle, there’s no reduction in longevity of your money by converting.

george grombacher 12:18
Yeah, yeah, I certainly appreciate that. And it makes sense. So when when we do a conversion, if we can just walk through an example, say I have $100,000 in my traditional IRA, and I say, okay, everything that Jay just said makes sense. I’m going to convert all of it or a portion into a Roth IRA. How does that actually work? If I’m, if I’m 4040 years old,

Unknown Speaker 12:45
right? So so now now is where there’s a little bit of artwork that comes into the conversation, because what you want to do is you want to convert in a way, if you can, where it’s not going to push the any amount that you convert in a given here is going to be 1099, you got to put it on your tax return. Okay, so what you want to do is you want to convert an amount as much as you can, without driving you into the next tax bracket where your overall tax bill will be higher. So there’s a little bit of artwork, and typically, you’re going to have to get a tax advisor or a CPA to help you determine what that amount is. So I wouldn’t necessarily do it all at once, I would try to feather it so that you optimize the quote unquote, conversion cost. Over over a number of years. Now, there’s a few dates that you’ve got to keep in mind. Depending on what stage of life you’re at, for one thing, the what’s commonly known as the Trump era tax cuts, the Cares Act, tax code that’s in effect right now, sunsets at the end of 2025. And without any legislative action, we know that tax rates are going to go up, you know, automatically starting January one of 26. So that might be a date that would influence how quickly you try to convert. If you’re in your late 60s, the the date that might influence you as RMDs kicking in at age 72, particularly if it’s money that you don’t necessarily need to draw out. You don’t want to have that forced taxation of required minimum distributions of starts at age 72. So that might be a date that drives your decision making. The third thing is if you you typically want to get this done before you start drawing Social Security. Why because you want to avoid the taxation of Social Security and because the what’s called Irma, which is what drives your Medicare premiums that would kick in. So depending on where you are in life is going to dictate the speed or the the pace at which it’s going to make most sense to convert Nice. So

george grombacher 15:05
not without complexity, but not insurmountable by any stretch of the imagination.

Unknown Speaker 15:11
No, you’re right. It’s complex. And that’s probably a reason that a lot of people, as we said earlier, you’ll tend to kind of bury their head in the sand and say me, I’ll deal with this later. But I think the message, what I’m trying to convey to people is, there is a real cost a real lifestyle cost to not addressing this as soon as you can, particularly if you think the future of taxation is higher versus the same or lower. So it’s, it’s worth getting into, it’s a little bit more difficult to find the right professional who can help you think through it, kind of the way that we outlined here, but it’s definitely worth it. I think, for the average American, there are 10s, if not hundreds of 1000s of dollars on the table through this decision, and therefore, it makes it pretty darn important.

george grombacher 16:08
Yeah, there’s no doubt. Jay, given us a lap, two people are ready for that difference making tip, what do you have for them?

Unknown Speaker 16:16
I think the big difference making tip George is to no matter what part of life you’re in, whether you’re 25 or 75, more so than ever before, you really need to be focused on what the future of tax policy looks like it how that’s gonna affect your wealth, your retirement income, your lifestyle. Just give that more attention to perhaps what you have in the past because it’s a real issue, and it’s likely to be a lot more volatile going forward.

george grombacher 16:44
Well, I think that is great stuff that definitely gets come up. Jay, thank you so much for coming back on where can people learn more about you? How can they engage with you to pick up this conversation?

Unknown Speaker 16:54
The easiest thing George is through our website, it’s Val Amman, ve L O M O N calm, or people are welcome to email me at J J. A y at Belmont calm, happy to answer any questions or provide any information that I can.

george grombacher 17:10
Excellent. Well, if you enjoyed this as much as I did, so Jay, your appreciation and share today’s show with a friend who also appreciates good ideas go to Val amman.com It’s ve L O M O n.com. Shoot me an email Jay at Belmont calm and not that your head is in the sand. But if it happens to be down there, it’s it’s I think it sounds like it’s time to pull it out and at least to figure out if this is a good strategy for you. Thanks. Good, Jay.

Unknown Speaker 17:40
My pleasure, George, take care.

george grombacher 17:42
And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai

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